Posted on Wednesday, January 5, 2011
NEW YORK — Bank of America Corp. reached a $2.8 billion settlement with Fannie Mae and Freddie Mac over claims that one of its businesses sold bad mortgages. The payment is far lower than analysts expected and removes some uncertainty that has hovered over the bank.
The settlement is the biggest yet involving banks and the two government-backed mortgage giants, which continue to suffer huge losses from the collapse of the housing market. Analysts and investors have been waiting to see how hard a line Fannie and Freddie would take with big mortgage lenders such as Citigroup Inc., JPMorgan Chase & Co. and Wells Fargo & Co. Some estimates ran as high as $10 billion for a Bank of America settlement.
"The government gave Bank of America a very attractive deal," said Christopher Whalen, managing director of Institutional Risk Analytics.
Bank stocks rallied on the news, with Bank of America up more than 6 percent and Wells Fargo up 2 percent. Other settlements are likely soon.
The claims stem from mortgages sold to Fannie and Freddie by former mortgage giant Countrywide Financial, which Bank of America bought in 2008. The two government-backed agencies buy mortgages from lenders and re-sell them to investors. They want banks to buy back mortgages that had incorrect information about the income and other qualifications of borrowers. During the housing boom, lenders such as Countrywide routinely gave mortgages to people who ultimately couldn't afford them. This lit the fuse for the financial meltdown in 2008. Most of the mortgages that Fannie and Freddie want to sell back to the banks are in default.
By removing this as an issue, Bank of America CEO Brian Moynihan hopes investors will buy his message of focusing on customers and building its traditional banking business. But Bank of America has several big challenges remaining. Last fall, the bank was accused of using faulty documents to foreclose on thousands of homeowners. All 50 state attorneys general have launched investigations into the foreclosure practices of Bank of America and other banks. Bank of America also faces lawsuits from other investors who are trying to recoup losses from mortgages they say contained faulty information.
There are also questions related to Monday's deal. The settlement contained two parts: Bank of America paid $1.3 billion in cash to Freddie Mac. In turn, Freddie Mac won't force Bank of America to buy back the faulty mortgages. In the second part, Bank of America paid $1.5 billion to Fannie Mae. But this only settled past claims. Fannie Mae still owns a total of $397 billion of mortgages made by Bank of America. Fannie can still ask Bank of America to repurchase any loans deemed faulty. That could still cost Bank of America as much as $5.5 billion, according to estimates by Chris Gamaitoni, vice president at Compass Point Research.
Bank of America spokesman Jerry Dubrowski said the bank has set aside enough reserves for such losses and dismissed Compass Point's estimates as "highly unlikely." As part of the settlement, the bank anticipated that its fourth-quarter provision for losses will be $3 billion and that it will take a charge against earnings of about $2 billion.
"The settlement clears the air and puts the issue behind for Bank of America," said Bert Ely, president of bank consultant Ely & Co.
It was the second settlement in a week. The first involved Ally Financial Inc., which agreed to pay $462 million in lieu of buying back faulty mortgages from Fannie Mae in the future.
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