BofA Will Buy Back $330 Million of Mortgages From Freddie

Bank of America Corp., the second- biggest U.S. lender, will buy back $330 million of home loans from Freddie Mac, the mortgage company seized by the government, after flaws were found in how they were created.

Payments on the “vast majority” of the loans are current, according to Dan Frahm, a spokesman for the Charlotte, North Carolina-based bank. McLean, Virginia-based Freddie Mac disclosed the buybacks in a statement yesterday, without directly citing the lender.

Bank of America agreed to the refunds “because the valuation method used at origination did not meet the investor’s technical requirements,” Frahm said in an e-mail, adding that the flaws have been fixed.

Chief Executive Officer Brian T. Moynihan is seeking to limit further losses at the bank after booking more than $42 billion in costs tied to defective home loans. Buyers and insurers of mortgage securities have demanded compensation for shoddy debt created by Countrywide Financial Corp., which Bank of America bought in 2008 when the target ranked as the nation’s biggest residential lender.

Freddie Mac and Bank of America announced a $1.28 billion settlement in January 2011 over bad loans sold through 2008 by Countrywide. Other business between the companies wasn’t covered by the deal, and at least some of the loans covered by Freddie Mac’s latest announcement have more recent origination dates, according to data compiled by Bloomberg.

Appraisal Methods

“The loans were underwritten using alternative valuation methods that were prohibited for use in the underwriting of the particular types of mortgages involved,” Brad German, a spokesman for Freddie Mac, said in an e-mail. Affected mortgage bonds had “fairly high” concentrations of loans on two- to four-unit properties, according to analysts at Nomura Securities International Inc. Home valuations can involve the use of licensed appraisers or computer models.

Analysts speculated that the claim was tied to a change in how mortgages are reviewed that was disclosed earlier this year after the inspector general for the Federal Housing Finance Agency, the regulator for Freddie Mac, criticized the firm’s earlier deal with Bank of America.

“These loans were not subject to any revised loan sampling methodology,” German said. “While the repurchase transaction followed our normal course of business, we believe the contract violations that triggered it constituted a one-time occurrence by the lender.”

Banks sell mortgages to investors and government-backed enterprises with a promise to buy them back if data on borrowers, their income or the property later turn out to be false.

Backlog Expands

Bank of America’s backlog of pending demands for refunds on soured loans reached a record $16.1 billion in the first quarter as a dispute deepened between the bank and Fannie Mae, the other U.S.-controlled mortgage buyer, which stopped accepting new loans from Bank of America in January. The government bailed out and seized both Fannie Mae and Freddie Mac during the credit crunch.

Moynihan told investors at a conference this week that reserves will blunt the costs of claims and litigation. “A lot of that has been put on the balance sheet,” he said.

Bank of America’s buyback of the loans, which are now packaged into securities guaranteed by Freddie Mac, will damage bond investors while the lender winds up owning mortgages that pay more interest than it could get from making new ones at today’s prevailing rates.

Interest Rates

The weighted average interest rate on loans in the securities listed in Freddie Mac’s statement as most affected by the buybacks is 5.91 percent, compared with typical rates on new loans of less than 4 percent, according to Bloomberg data.

The loans to be repurchased account for 52 percent of the collateral for those bonds, which are trading at almost 110 cents on the dollar, according to Bloomberg Valuation prices. Investors will be paid off at par -- 100 cents on the dollar -- and lose the above-market interest rates.

Investors holding similar mortgage-backed securities may be concerned they’ll suffer the same fate, Barclays Plc analysts including Nicholas Strand, Sandipan Deb and Siddarth Ramkumar wrote in a report. Bond buyers are wondering whether “similar buyouts are being considered or being implemented at Fannie Mae,” the Barclays analysts wrote.

To contact the reporter on this story: Jody Shenn in New York at jshenn@bloomberg.net

To contact the editors responsible for this story: Rick Green at rgreen18@bloomberg.net; Alan Goldstein at agoldstein5@bloomberg.net

Press spacebar to pause and continue. Press esc to stop.

Bloomberg reserves the right to remove comments but is under no obligation to do so, or to explain individual moderation decisions.

Please enable JavaScript to view the comments powered by Disqus.