By Dean Seal
Ambac Financial Group Inc. and Bank of America Corp. have resolved longstanding litigation related to residential mortgage-backed securities with a $1.84 billion settlement, sending Ambac’s shares soaring.
Ambac said Friday that the companies agreed to resolve claims that residential mortgage-backed securities it insured prior to the financial crisis were backed by loans that had been underwritten with substandard origination practices by the now-defunct Countrywide Financial, which Bank of America purchased in 2008.
The settlement exceeds the amount of subrogation recovery logged on Ambac’s most recent financial statements, and the company said it expects to record a gain of $390 million with the agreement.
The insurer reported $1.48 billion in gross subrogation recovery related to the residential mortgage-backed securities litigation, $1.38 billion of which was tied to the Bank of America case.
A portion of the gain will be recognized on Ambac’s third quarter financial statement, with the rest following in the fourth quarter, it said.
As part of the deal, Ambac said its Ambac Assurance Corp. subsidiary will repay more than $1.42 billion in notes.
In premarket trading, Ambac shares climbed more than 23% to $15.82.
Bank of America said in a securities filing that Ambac had been seeking more than $3 billion in damages and that the banking giant has previously accrued for certain amounts of the settlement payment.
As a result of the settlement, Bank of America said it expects to incur a pretax expense of $354 million in the third quarter, which will cut earnings by 3 cents a share.
Bank of America shares were up slightly at $31.62 in premarket trading.
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