Jan. 7 (Bloomberg) -- Bank of America Corp. agreed to an $11.7 billion package designed to resolve most mortgage disputes with U.S.-owned Fannie Mae after a deal announced two years ago proved inadequate.
Bank of America will make a $3.6 billion cash payment, spend $6.75 billion to buy back residential loans sold to Fannie Mae, and pay $1.3 billion in fees for taking too long to assist or foreclose on overdue borrowers, according to separate statements. Even after these costs and an additional $2.5 billion for expenses that include litigation and a separate regulatory settlement, the Charlotte, North Carolina-based lender said the fourth quarter was “modestly” profitable.
It’s the latest effort by Chief Executive Officer Brian T. Moynihan to cap the damage caused by his predecessor’s takeover of Countrywide Financial Corp. and its defective subprime home loans. Before today, the bank committed more than $40 billion since 2007 to cover the costs of refunds and litigation tied to faulty mortgages and foreclosures. Much of that sum went to the government-sponsored entities of Fannie Mae and Freddie Mac.
“This does put the GSE stuff behind it,” said Paul Miller, an FBR Capital Markets Corp. analyst who has a hold rating on Bank of America shares. “We thought this would be dragged out many years, or at least another two years.”
Bank of America said its deal with Fannie Mae will reduce fourth-quarter profit by about $2.7 billion, mostly by adding to reserves for refunds. Remaining demands for loan buybacks may cost $4 billion more as of year-end 2012, the firm said. Before today’s deal, the lender’s estimate of remaining costs was $6 billion, indicating the settlement cost more than expected.
“Together, these agreements are a significant step in resolving our remaining legacy mortgage issues,” Moynihan, 53, said in the bank’s statement. Bank of America is the second-biggest U.S. bank by assets and was the largest U.S. home lender before the 2008 credit crisis. The firm’s shares were little changed at $12.04 as of 12:17 p.m. in New York.
Fannie Mae, Freddie Mac and other buyers of mortgages have demanded compensation for loans created by Countrywide, which Bank of America acquired in 2008, claiming the loans were based on flawed data about the properties and borrowers that led to record defaults.
The dispute with Fannie Mae peaked last year in January when the Washington-based firm refused to renew its contract to purchase new loans from Bank of America. Today’s settlement clears the way for the two firms to potentially renew their relationship, said a person with direct knowledge of the process.
Negotiations between the companies gained momentum in recent weeks when Bank of America increased its offer to Fannie, said the person, who sought anonymity because talks were private.
The agreement covers $300 billion in outstanding principal on loans sold to Fannie Mae between 2000 and 2008. In separate deals, the lender also agreed, with permission from Fannie Mae and other mortgage firms, to sell servicing rights on $306 billion in home loans to so-called specialty servicers.
The company sold mortgage servicing rights covering 2 million loans, saying that would significantly reduce the numbers of delinquent borrowers it has to deal with. Nationstar Mortgage Holdings Inc. said in a statement it will acquire $215 billion in residential mortgage-servicing rights for about $1.3 billion. The stock soared as much as 19 percent today.
In January 2011, Bank of America said it was paying $2.8 billion to Fannie Mae and Freddie Mac to settle disputes over mortgages, and that the deals “largely addressed” the liabilities. Its agreement with Freddie Mac proved to be more comprehensive as claims from Fannie Mae climbed quarter after quarter. Fannie Mae’s statement today outlined some exceptions that may not be covered, with Bank of America saying the cost isn’t expected to be material.
The disputes over mortgages and demands for refunds have made investors skeptical about the true value of Bank of America’s assets, with the stock selling at about 92 percent of tangible book value, the firm’s theoretical liquidation price.
“They’re becoming less risky,” said Marty Mosby, an analyst with Guggenheim Securities LLC. “As long as the bank is trading below tangible book value, anything they can do to de-risk the balance sheet brings their stock price closer and closer to achieving tangible book value.”
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