Posted on 07 Jan 2013 by Neilson
Bank of America Corp. reached an $11.6 billion settlement with mortgage-finance giant Fannie Mae to settle a long-running standoff over nearly a decade's worth of home loans, the bank's latest bid to resolve its biggest hangover from the acquisition of Countrywide Financial Corp. five years ago.
The deal, announced Monday, includes a $3.55 billion cash payment and $6.75 billion repurchases of soured mortgage loans. In addition to the settlement, Bank of America will also pay $1.3 billion in fees to Fannie related to its role as a loan payment processor for the mortgage-finance giant.
The Charlotte, N.C. bank said it would take a $2.7 billion pretax charge in the fourth-quarter related to the deal, and $2.5 billion in other charges on other mortgage-related matters.
Combined with tax benefits and changes in the valuation of its debt, the bank said it expected fourth-quarter earnings to be "modestly positive." Analysts had expected the bank, which is to report earnings on Jan. 17, to report pretax income of $3.5 billion and net income of $2.3 billion.
The deal resolves the biggest piece of outstanding litigation facing the bank, which settled class-action lawsuits over its 2008 acquisition of Merrill Lynch for $2.4 billion in the third quarter of 2012.
Decisions to buy Countrywide and Merrill have forced Bank of America, run since 2010 by Chief Executive Brian Moynihan, to set aside more than $44 billion in litigation expenses, payouts and reserves, according to company figures. The funds are meant to absorb a litany of Merrill-related lawsuits and claims from investors who say Countrywide wasn't honest about the quality of mortgage-backed securities it issued before the crisis.
That total includes the deal announced Monday and a landmark $8.5 billion agreement reached in 2011 with a group of high-profile mortgage-bond investors.
The agreement with Fannie Mae covers $11.2 billion in demands from Fannie that BofA repurchase soured mortgages that the agency believed didn't meet proper underwriting standards, issued from the beginning of 2000 to the end of 2008 by Countrywide Financial, which the lender acquired in 2008, and Bank of America, National Association, another Bank of America unit.
"Together, these agreements are a significant step in resolving our remaining legacy mortgage issues, further streamlining and simplifying the company and reducing expenses over time," Mr. Moynihan said in a statement Monday.
It was unclear how the settlement of Fannie's mortgage claims will impact a lawsuit filed by the U.S. Attorney's Office in Manhattan against Bank of America last year over the same issues. The lawsuit claims Bank of America, through its acquisition of Countrywide, misled Fannie and its smaller sibling, Freddie Mac, about the quality of its home loans, and sought at least $1 billion related to the taxpayer cost of the bailout for the two federal mortgage underwriters.
The agreement also is separate from an $8.5 billion foreclosure-abuse settlement between regulators and 10 banks, including Bank of America, also announced Monday. That pact is in addition to another settlement reached last February, where five large banks, including Bank of America, agreed to a $25 billion settlement with the Obama administration and 49 state attorneys general.
Fannie and Freddie have collected tens of billions from banks over the past four years by requiring them to buy back defaulted mortgages that have been found to run afoul of the companies' underwriting guidelines.
While banks of all stripes have grumbled about Fannie's zeal in putting back loans, Bank of America's dispute with Fannie was unusual. Bank of America, the second-largest U.S. bank by assets, stopped buying back a large number of loans where Fannie was demanding repurchase two years ago, saying that Fannie had unilaterally changed its reading of certain loan contracts.
The standoff neared a breaking point last February, when Fannie took the remarkable step of declining to renew its loan-sales contract with BofA. As a result, Bank of America, which had briefly been Fannie's top loan customer after its acquisition of Countrywide, stopped selling most of its mortgages to Fannie.
Bank of America has sharply pared back its mortgage-origination channels over the past two years, largely as a result of rising legal costs resulting from the Countrywide acquisition. It has exited the business of funding third-party loans in favor of lending to customers with which it already has a relationship. It isn't clear whether Monday's settlement will pave the way for BofA to resume mortgage sales to Fannie.
"A favorable resolution of this long-standing dispute ... is in the best interest of taxpayers," said Bradley Lerman, Fannie Mae's general counsel. "We are pleased to have reached an appropriate agreement."
Edward DeMarco, the acting director of Fannie's federal regulator, called the settlement a "major step forward" in reducing uncertainty in the mortgage market.
Monday's settlement follows separate agreements that Bank of America struck two years ago with Fannie to pay nearly $1.3 billion to extinguish certain repurchase claims. That one didn't cover many Countrywide loans. A separate, more comprehensive $1.3 billion settlement between Bank of America and Freddie Mac, reached at the same time, had been criticized by a government watchdog as inadequate.
Fannie and Freddie were taken over the by U.S. government 4½ years ago and have cost taxpayers $137 billion to date. After years of hemorrhaging red ink, the mortgage companies have posted significant profits over the past year.
Meanwhile, the bank also announced it would sell mortgage servicing rights on 2 million home loans totaling $306 billion in unpaid principal balance, around half of which are insured or owned by Fannie. The acquirers include Walter Investment Management Corp.,a Tampa, Fla.-based asset manager, mortgage servicer and originator, and Nationstar Mortgage Holdings.