Bank of America Corp. (BAC) has agreed to pay $2.8 billion to Fannie Mae (FNMA) and Freddie Mac (FMCC) to buy back soured mortgages and expects to take a provision of about $3 billion in the fourth quarter to cover the repurchase cost.
The move represents the latest effort at the largest U.S. bank by assets to put behind the issue of sloppy underwriting at Countrywide Financial, the giant mortgage originator Bank of America bought in 2008. The news provides more clarity to investors on the question of how many bad Countrywide mortgages Bank of America will need to take back from government-sponsored enterprises, or GSEs, such as Fannie and Freddie.
But the issue of mortgages purchased by other investors and in default remains a pressing concern for shareholders at several big banks.
„This is a favorable outcome for Bank of America. It eliminates the worst-case scenario“ of losses tied to these so-called putbacks from GSEs, said David Trone, an analyst with JMP Securities. The Charlotte, N.C., bank’s shares rose 6.4% in late afternoon trading to $14.20.
In a separate matter, Bank of America said it will write down the value of its home-loans and insurance business by $2 billion in the fourth quarter. The move reflects rising costs and falling revenue in the mortgage business since the financial crisis.
Considerable risk remains from bad mortgages Bank of America sold but might have to take back. Private investors are suing Bank of America to force the bank to buy back mortgages that were sold on the open market because they didn’t conform to the underwriting guidelines of Fannie and Freddie. Analysts said the bank might have to pay $10 billion to $15 billion to buy back such loans over several years.
The agreement includes a cash payment of $1.28 billion to Freddie and $1.52 billion to Fannie, both of which were made Friday. Executives from both companies said the agreement is in the best interests of all parties.
While the agreement with Freddie Mac resolves outstanding and potential future repurchase claims, the agreement with Fannie Mae covers outstanding claims only, and the bank anticipates it will „make whole“ future claims, Bank of America’s Chief Financial Officer Charles Noski told investors during a conference call.
He said $2.7 billion in put-back claims remain, mainly on mortgages that Bank of America, rather than Countrywide, originated and sold to GSEs. The bank already reserved for potential losses from such claims.
Those remaining claims and future Fannie claims could add up to $2.72 billion in potential future losses from the GSEs, Stifel, Nicolaus & Co. analyst Christopher Mutascio wrote in a research note.
Still, Monday’s agreements „resolve substantial legacy issues in the best interest of our shareholders,“ Bank of America Chief Executive Brian Moynihan said in a press release.
While Monday’s agreement with the GSEs doesn’t affect the potential putbacks from private investors, it does convey some sense of the size of that risk, said Sandler O’Neill & Partners analyst Jeffery Harte. He said it is unlikely that total mortgage buybacks would exceed the $10 billion he estimated, but that putbacks might come in lower. The agreement adds „incremental clarity“ about how the putbacks are calculated, he said.
Sanford C. Bernstein & Co. analyst John McDonald wrote in his research report that losses from claims by private investors „will remain a big wildcard“ for Bank of America, and he added he will need to see how private investors fare in lawsuits or negotiations „before getting any insight into how much BofA may need to set aside for these claims.“
However, the agreement shows that Bank of America is willing to settle claims, and, as such, „shows willingness…to take more control of the situation, and sets a tone for the year,“ CLSA analyst Michael Mayo wrote in a research note to investors.
Fannie and Freddie have been stepping up demands that lenders take back defaulted loans when they find that the mortgages weren’t of as good quality as the seller said when the deals were done. The two giant mortgage buyers have been operating under federal conservatorship since September 2008. Keeping them afloat has cost taxpayers about $134 billion so far.
Shares of Fannie rose 10%, to 33 cents, while Freddie advanced 6.6% to 33 cents.
By Matthias Rieker and Tess Stynes
Of DOW JONES NEWSWIRES http://online.wsj.com/