Bank of America will pay mortgage giant Fannie Mae $3.6 billion and buy back more than 30,000 loans to resolve a long-running dispute between the two, the bank announced Monday. The Charlotte bank will pay more than $10 billion in total.
The settlement covers mortgages totaling about $1.4 trillion originated primarily by Countrywide Financial Corp. and sold to Fannie Mae between 2000 and 2008.
After they started to go sour, Fannie Mae sought to force Bank of America – which bought Countrywide in 2008 – to buy them back, claiming that the bank misrepresented the quality of the loans. The two had battled over the loans for at least a year.
A large portion of the settlement will be paid out of the bank’s reserves. The agreements will cut into Bank of America’s fourth-quarter earnings by about $2.7 billion, the bank said.
This settlement takes care of one of the largest issues looming in investors’ minds. It is unrelated to an $8.5 billion mortgage servicing settlement also announced Monday in which Bank of America is also participating.
Bank of America’s stock was essentially unchanged Monday, closing down 2 cents at $12.09.
“Together, these agreements are a significant step in resolving our remaining legacy mortgage issues, further streamlining and simplifying the company and reducing expenses over time,” CEO Brian Moynihan said in a statement.
Analysts with Guggenheim Securities described the agreement as a way for Bank of America to reduce risk on the balance sheet without affecting its capital position.
“We believe this announcement should be positive for (Bank of America) as it continues to resolve overhang issues without realizing net earnings losses and operating earnings remain at the upper range of expectations,” they wrote in a research note Monday.
‘Best interest of taxpayers’
Fannie Mae said the 30,000 loans Bank of America is repurchasing had the “ potential to cause significant future losses.” Fannie is still under conservatorship by the Federal Housing Finance Agency.
“Resolving these issues at this time is in the best interest of taxpayers and reduces uncertainty in the nation’s mortgage finance market,” Federal Housing Finance Agency acting director Edward J. DeMarco said in a statement. “This is a major step forward in resolving issues from the past and providing greater certainty in the marketplace.”
Bank of America also said it would sell the rights to service an additional 2 million mortgages, worth $306 billion, that are owned by the government-sponsored entities. About 10 percent of them were more than 60 days delinquent.
The bank also reported that it will have an additional $2.5 billion in costs related to mortgage servicing settlements and other mortgage matters when it reports fourth-quarter earnings next week.
It still expects earnings per share to be “modestly positive.”
Bank of America faced a similar situation during the third quarter, when it agreed to pay $2.4 billion to resolve a shareholder suit related to its acquisition of Merrill Lynch. When its earnings report came out, the bank roughly broke even.
Analysts at Barclays Capital wrote in a research note Monday that the bank “essentially gives up yet another quarter” but “takes yet another step in putting extensive legacy issues behind it.”
Dunn: 704-358-5235 Twitter: @andrew_dunn