Fannie, Freddie win $3.3 billion in mortgage settlements

Jan 3 2011 - 3:17pm

HARLOTTE, N.C. -- Looking to resolve one of its major mortgage headaches, Bank of America Corp. on Monday said it has paid $2.8 billion to settle claims related to soured Countrywide Financial Corp. mortgage loans.

Ally Financial Inc., formerly known as GMAC, also settled for almost $500 million.

The agreements with mortgage giants Freddie Mac and Fannie Mae reduce uncertainty over the banks' mortgage liability. But Bank of America, the nation's largest bank, still faces claims from other investors who bought questionable home loans from Countrywide and the Charlotte bank during the housing boom.

Bank of America said it will set aside $3 billion in the fourth quarter to cover the settlements and other potential losses related to mortgage loans sold to Freddie and Fannie. The bank will also take a separate $2 billion charge as it writes down the value of its home loans unit, which grew dramatically with the 2008 purchase of Countrywide Financial Corp..

Mortgage repurchase claims are one of the many problems still plaguing banks in the wake of the nation's financial meltdown. During the housing boom, banks sold off many of the loans they made to investors, allowing them to make even more loans. In certain circumstances, however, the investors who bought the loans can require banks to buy them back when the mortgages go bad.

For Bank of America, the settlements with the two government-controlled mortgage entities are the latest example of the high cost of the Countrywide acquisition. Buying the troubled lender for an initial price of $4 billion has led to quarterly losses, legal settlements and an ongoing investigation of foreclosure practices.

The Freddie and Fannie agreements are somewhat surprising because Bank of America CEO Brian Moynihan has previously said he planned to battle claims by mortgage investors "loan by loan." But he has also repeatedly expressed his desire to put "legacy issues" behind the bank.

In a conference call with analysts Monday, Chief Financial Officer Chuck Noski said the agreements should not be seen as a "departure" from the bank's previous stance. Noski said the bank has pledged to act "act responsibly" in cases where investors meet the standard for requiring mortgage buybacks. But, he said, Bank of America will continue to "vigorously defend" claims that do not meet that benchmark.

Although the bank could still face more expenses related to loans owned by Freddie and Fannie, Noski said the bank has now "largely addressed" its remaining exposure to those two entities with the settlements and the amount it has set aside for losses.

In a report, Jeffrey Harte, an analyst with Sandler O'Neill + Partners, said $3 billion was a "large number" but largely in line with estimates for losses over the next few years. Analysts said the move will reduce future quarterly losses related to Freddie and Fannie. The bank is scheduled to give a more in-depth report on its fourth-quarter results on Jan. 21.

Including the settlements and previous losses, the bank has now incurred $6.3 billion in losses from repurchase claims on loans originated from 2004 to 2008. After the agreements, the bank said it has $2.7 billion in remaining Freddie and Fannie claims from all years. The bank, however, believes about $800 million of that can be eliminated when the bank comes up with requested loan documents.

At the end of the third quarter, Bank of America said it faced $12.9 billion in outstanding mortgage repurchase requests, about $6.8 billion from Freddie and Fannie. The remaining requests are from so-called "monoline insurers" and private investors who bought Countrywide and Bank of America loans.

In the face of potential legal action, the bank last month said it was in discussions with a group of private investors that includes money manager BlackRock Inc. and the Federal Reserve Bank of New York, which inherited a batch of Countrywide loans during 2008 bank bailouts.

The Freddie and Fannie settlements both cover Countrywide loans but differ substantially. Bank of America paid Freddie $1.28 billion to cover "any alleged" breaches related to mortgage purchases through 2008. The $1.52 billion Fannie settlement covers only existing claims made through Sept. 20, 2010.

Banks can be required to buy back loans for a number of reasons. In its latest quarterly filing, Bank of America said successful claims were primarily related to compliance with underwriting standards, including "borrower misrepresentation" and "credit exceptions." Private investors generally face a higher burden than Freddie and Fannie in requiring buybacks, the filing said.

In a statement Monday, Freddie Mac CEO Charles Haldeman Jr. said his organization's settlement was "in all parties' best interest." Fannie Mae CEO Michael Williams said his agreement was a "fair and responsible resolution." Fannie Mae continues to work to resolve other claims, including ones related to Bank of America-originated loans, he said.

Separately, Bank of America announced Monday that the Federal Reserve Board has confirmed that the bank has successfully raised $3 billion in capital by selling off assets and other transactions. The Fed required the bank to raise the amount as part of a 2009 agreement to pay back $45 billion in bailout loans. Raising the money means the bank doesn't have to raise capital by selling stock.


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