Bank of America has agreed to pay $8.5 billion to resolve claims that the financial and insurance company sold mortgage-backed securities that are of low-quality before the collapse of the housing market.

The deal came after a group of investors insisted that the North Carolina-based company repurchase $47 billion worth of mortgages that the Countrywide unit sold in bonds. The agreement between parties was announced Wednesday morning.

The investors argued that Countrywide, which was bought by Bank of America for $4 billion in 2008, expanded itself at the investor’s price by servicing bad loans and continuing servicing fees. Bank of America has denied such allegations.

The mortgage settlement would reduce future uncertainty in the banking industry and resolve the issues caused by their acquisition of Countrywide, said Brian Moynihan, chief executive officer of Bank of America, on Wednesday.

The settlement, which covers 530 trusts with $424 billion principal balance, is subject to the approval of the court.

According to Keith Horowitz, a Citi analyst, the settlement that is equivalent to only 2% of the original principal balance, eliminates one of the biggest risks of investors for Bank of America.

Also, the settlement puts Bank of America to a second-quarter loss between $8.6 billion and $9.1 billion. The bank is expected to release a quarterly loss between $3.2 billion and $3.7 billion, not including the settlement and other charges.

The Bank of America Corp had a 4 percent increase in shares to $11.30 before the market opened. The investors are glad that the bank can place huge uncertainty behind it.

Bank of America Corp. said on Thursday that it is separating its mortgage business into two divisions, with a new unit created particularly to manage and handle foreclosures, as well as discontinued loan products.

The new Legacy Asset unit will be in charge of resolving issues that involve faulty paperwork causing Bank of America to defer foreclosures in all 50 states in October, the bank said.

Also, mortgage modifications and buyback claims on bad home loans sold to investors will be handled by the legacy unit. It will be headed by Terry Laughlin, who joined the bank as an executive in its mortgage unit handling loss mitigation strategies in July 2010.

The shift is the most recent in a series of management changes since Brian Moynihan took over as CEO in January 2010.

According to the bank’s year-end financial report, Bank of America Home Loans lost $8.92 billion in 2010 mainly because of the toxic loans it received when it purchased Countrywide Financial Corp. in 2008.

Countrywide reached a disaster when many of its borrowers could not repay mortgages with adjustable rates that did not require proof of income or down payment. Bank of America has also been plagued with lawsuits and buyback claims over the investment securities backed by those loans.

Bank of America Home Loans will carry on handling new loans, as well as the servicing of loans that are up-to-date. Barbara Desoer, who has led the unit since 2008, will continue running the unit.

The bank reported $306 billion new mortgages in 2010. According to regulatory filings, it had a mortgage servicing portfolio of $2.06 billion at the end of the year.

AIG selected Bank of America Corp, Golden Sachs Group Inc, Deutsche Bank AG and JPMorgan Chase & Co to manage the sale of the government’s 92 percent stake in the insurer, two people knowledgeable with the circumstance said on Tuesday.

American International Group Inc and the government conducted a “bake off” in New York on Thursday. They hosted bankers and CEOs from ten of the largest firms in the world to pitch for the right to manage the deal.

Two of the three joint lead arrangers on AIG’s $4.3 billion bank credit lines were Bank of America and the JPMorgan. Meanwhile, AIG and Goldman have a strong relationship. Deutsche Bank’s connection is somewhat unclear though AIG is likely to pitch investors assertively for a huge, global shareholder base.

The winning banks are likely to divide a fee that is smaller than the 75 basis points of the offering amount which the government paid the other year for the first public offering of General Motors Co (GM.N). The fee might be nearer to 50 basis points.

Considerably smaller than the normal fee for a secondary offering of this size, the banks are still anticipated to make up for the lost revenue with the reputation of handling a marquee deal and the chance at future business with AIG.

Sources said the process is expected to begin with a secondary offering in May that could be one of the 10 biggest in history. The government is anticipated to sell a minimum of $15 billion of its shares in AIG, and the company is expected to sell a further $3 billion on top of that.

Bank of America Corp has decided to pay $137 million to patch up allegations that helped rig the municipal bond bidding process and win several businesses from towns and cities in 20 states. This agreement is expected to cause more cases being filed in the next several weeks and months.

Federal, as well as state officials have announced the settlements on Tuesday along with the largest bank in the nation.

The bank did not admit nor deny any of the accusations in its agreement with the Justice Department, the Federal Reserve, the Securities and Exchange Commissions, and several attorneys universal for 20 states.

According to the Justice Department, the Bank of America came over and revealed that Banc of America Securities, a part of the bank that manages securities and investments, paid for information that helped the bank gain advantage with the government from the local unit that was finding to invest their proceeds from the municipal bond sales.

The Securities and Exchange Commission said the bank division paid money as “kickbacks” to bidding agents who gathered proposals for government business. In return, the bank received information regarding what other firms were bidding.

This revelation resulted from federal officials launching a widespread investigation regarding the business of reinvesting municipal bond proceeds.

Bank of America, which is the first largest U.S bank by assets, was granted amnesty from any penalties since they were the first to report the violations to regulators and they cooperated with the investigation.

A Bank of America spokesman said that the financial institution is pleased to put this matter behind them, and they have already voluntarily undertaken several remediation efforts.