Bank of America Corp., the biggest U.S. lender by assets, paid $2.8 billion to Freddie Mac and Fannie Mae after the U.S.-owned firms demanded the company buy back mortgages they said were based on faulty data. The bank rose as much as 5.6 percent in New York trading.
Resolving the disputes cost Bank of America about $3 billion in the fourth quarter, including additions to loss reserves for loans that weren’t a part of the deals announced today, the Charlotte, North Carolina-based lender said in a statement. The agreements “largely addressed” liabilities from Fannie Mae and Freddie Mac, Bank of America Chief Financial Officer Charles H. Noski said on a conference call.
Mortgage buyers including McLean, Virginia-based Freddie Mac and Washington-based Fannie Mae are trying to force lenders to repurchase loans that may have been made with incorrect data on income and home values. Before today’s announcement, Bank of America faced $12.9 billion in unresolved putback demands, with about half related to government-sponsored entities, according to an Oct. 19 presentation. The company said in October it had reserved $4.4 billion for costs related to the problem.
“It puts some hard numbers on some liabilities that nobody really had any sense on how bad it could go,” said Paul Miller, a bank analyst at FBR Capital Markets Corp. in Arlington, Virginia. “Now you’ve got a hard number and the math looked really good for Bank of America.”
Bank of America rose 61 cents to $13.95 at 10:39 a.m. in New York Stock Exchange composite trading, after rising to $14.08 earlier today. The lender dropped 11 percent last year, the biggest decline among the top 10 U.S. banks.
Bank of America also wrote down the value of its mortgage division by $2 billion and said it still faces putback claims from insurers and investors. MBIA Inc. sued the firm, claiming in a lawsuit it was fraudulently induced to insure $21 billion in mortgage-backed securities. A group including Pacific Investment Management Co. and the Federal Reserve Bank of New York are demanding repurchases on loans packaged into about $47 billion of bonds, people familiar with disputes said in October.
“We will vigorously defend ourselves against all other claims which fail to meet the agreed-upon standard for repurchase,” Noski said during the call. “Nothing that we’ve announced today should be seen as a departure from our basic principle as it relates to our representations and warranties liability.”
Reps and Warranties
When banks sell mortgages to investors or bundle them into securities, they typically offer “representations and warranties,” in which they guarantee that information backing the loans is accurate. Examples include borrowers’ income and the appraised worth of the home. If the data is proven wrong, the bank may buy back the loan or reimburse investors for the lost value.
The agreement provides for a $1.28 billion cash payment to Freddie Mac to resolve claims arising from 787,000 loans sold through 2008 by “legacy” Countrywide Financial Corp., Bank of America said in the statement. Bank of America also agreed to pay $1.34 billion in cash to Fannie Mae, after applying “certain credits” to an agreed-upon settlement of $1.52 billion.
The agreement with Freddie Mac involves loans with total unpaid principal of $127 billion, and the Fannie Mae agreement includes unpaid principal of $2.7 billion. The company’s estimate of costs related to the government-sponsored entities is based on assumptions including U.S. home prices, Noski said.
‘Clearly a Gift’
The settlement is “clearly a gift” to Bank of America, said Chris Whalen, a former Federal Reserve Bank of New York analyst and co-founder of Institutional Risk Analytics in Torrance, California. Fannie Mae and Freddie Mac are “taking a very passive posture so the loss will remain in Washington.”
The agreements don’t cover loan servicing obligations, other contractual obligations or loans contained in private label securitizations.
“This significant agreement with Bank of America is a fair and responsible resolution of these outstanding claims,” Fannie Mae Chief Executive Officer Michael Williams said in a statement.
The company also met its commitment to the Federal Reserve to raise equity by $3 billion through asset sales, the company said today in an e-mail. The company agreed to sell assets as part of the deal to let Bank of America exit the Troubled Asset Relief Program in December 2009.