Bank of America Corp. (NYSE: BAC) Agrees to Pay Fannie & Freddie $2.8 Billion On Bad Home Loans Claim

Bank of America Corp. (NYSE: BAC) yesterday (Monday) agreed to pay Fannie Mae (OTC: FNMA) and Freddie Mac (OTC: FMCC) $2.8 billion to settle claims that it sold the mortgage finance companies bad home loans that were issued by its troubled Countrywide Financial unit.

The announcement sparked a rally in the banking giant’s shares in New York trading, pushing BofA stock up as much as 4.5%.  Analysts said investors were relieved the bank would not have to buy back billions of dollars of home loans it sold to investors at the height of the housing boom.

"This takes away a nice headline risk" for Bank of America, Alan Villalon, a senior bank analyst at Chicago-based Nuveen Investments told Reuters.

The settlement represents the latest effort by the Charlotte-based banking icon to clean up part of the mess from the home mortgage meltdown.  After Bank of America acquired mortgage-originator Countrywide for $4 billion in 2008, the mortgages were quickly found to be some of the worst issued during the crisis, saddling the bank with mounting loan losses.

Bank of America, the biggest U.S. bank by assets,said it made a $1.28 billion cash payment to Freddie Mac as part of an agreement to settle all claims for calendar year 2008 related to mortgages sold by Countrywide.  The bank also paid Fannie Mae $1.34 billion in cash and additional credits to complete a $1.52 billion settlement on 12,045 Countrywide loans.

Before the settlement, Bank of America faced $12.9 billion in unresolved demands from buyers who claim they were sold faulty mortgages, according to data compiled by Bloomberg News. 

Those investors say the home loans may have been made with incorrect data on income and home values and should never have been sold to them in the first place because they did not meet investors' underwriting requirements.

Washington-based Fannie Mae said in a statement that the agreement with Bank of America addresses about 44% of its $7.7 billion in outstanding repurchase requests at the end of September.

The bank said in a statement that it still has $2.7 billion in outstanding repurchase requests from Fannie and Freddie not covered by the settlement. Chief Financial Officer Charles Noski said that figure includes $832 million of loans with incomplete documentation that can be resolved without any further big losses to the bank.

Bank of America said it would add $3 billion to its reserves to fund the Fannie and Freddie claims and expects to record a goodwill impairment charge of $2 billion in its home loans and insurance unit in the fourth quarter.

Even though the agreement only covers loans originated by Countrywide, the bank does not expect to add more reserves for additional repurchase requests from Fannie or Freddie in the future, Noski said in a conference call with analysts

While much larger in scale, the agreement is similar to a recent $462 million settlement Ally Financial Inc. reached last month with Fannie.

In October, BofA said it had worked through roughly two-thirds of its government-sponsored-entity (GSE) owned mortgage repurchases and had bought back $11.4 billion in mortgages from Fannie Mae and Freddie Mac. Bank of America also is still working through claims related to mortgages sold to private investors.

The head of the Federal Housing Finance Agency (FHFA), the government regulator for Fannie Mae and Freddie Mac, said other banks might be forced to reach similar agreements.

"While these agreements are an important step, the Enterprises (Fannie Mae and Freddie Mac) have other outstanding claims across a range of counterparties and they are being pursued," Edward DeMarco, acting director of the FHFA told Reuters.

As the largest mortgage servicer in the United States, Bank of America has been under fire since the beginning of the foreclosure crisis. The settlement announced yesterday will not put an end to the bank’s problems.

"This doesn't get the bank completely out of trouble. They're still going to face litigation on repurchases from private-label investors," Chris Whalen, senior vice president and managing director of Institutional Risk Analytics told Reuters.

Last week, The Allstate Corp. (NYSE: ALL) sued Countrywide over $700 million in residential mortgage-backed securities in which the insurer had invested.

After previously vowing to fight the claims of mortgage investors, the bank started negotiating with a group of investors last month in an apparent about-face.

Chief Executive Officer Brian Moynihan said in October the bank would not give in to investors with the attitude: "I bought a Chevy Vega but I want it to be a Mercedes."

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