Thursday, January 6, 2011

Bank of America to pay Fannie, Freddie $2.8 billion

Bank of America (BAC) said it agreed Monday to pay $2.8 billion to taxpayer-funded Fannie Mae and Freddie Mac to settle claims that it sold the mortgage giants bad home loans.

The agreement is the biggest so far between Fannie and Freddie and lenders that sold them loans during the subprime lending boom and before standards were tightened.

More such agreements are likely as Fannie and Freddie, which now buy about two-thirds of all home loans, then package and sell them to investors with a promise to cover losses, seek restitution for loans that they say failed to meet their underwriting standards. "All major banks will have something similar," says Guy Cecala of Inside Mortgage Finance.

The financial industry may face about $52 billion in costs from such mortgage claims, according to a consensus of Wall Street analyst estimates. While the costs will be huge, Monday's agreement underscores that they "won't put banks out of business," Cecala says.

BofA shares rose 6.4% Monday to $14.19. The agreement deals with loans originated by Countrywide Financial, one of the largest subprime lenders. BofA acquired it in 2008.

The cost to BofA, the nation's largest bank and mortgage servicer, was in line with most Wall Street estimates, which reduced fears among investors that costs could go much higher for the whole industry, says Paul Miller, banking analyst at FBR Capital Markets. He says the agreement also sets the "ground rules" for future deals.

Fannie and Freddie, which were taken over by the government more than two years ago, may get more restitution than private investors, Cecala says, because lenders need the mortgage giants to continue to buy their loans.

The Federal Housing Finance Agency, which regulates Fannie and Freddie, said the BofA agreements — and a recent deal in which Ally Financial agreed to pay $462 million to Fannie Mae for similar claims — return $3.3 billion to taxpayers.

The BofA agreement resolves the bulk of BofA's exposure to Fannie and Freddie. But it still faces potential liabilities from mortgages it sold to private investors. In a statement, BofA CEO Brian Moynihan said that one of the bank's main goals is to "put these issues behind us."

As part of the deal, BofA made a $1.28 billion cash payment to Freddie Mac. It paid Fannie Mae $1.52 billion.

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