Bank of America Reaches Settlement with Fannie Mae
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Bank of America Corp. (NYSE: BAC), the second largest U.S. bank, has taken a step closer to ending the mortgage mess that has troubled it since the financial crisis of 2008.
Settlement with Fannie Mae
On Monday, the Charlotte, North Carolina-based bank announced that it reached agreements with Fannie Mae to settle claims related to mortgage sales during the housing bubble.
The deal announced on Monday will see Bank of America make a payment of $3.6 billion in cash to Fannie Mae. In addition, the bank will also buyback $6.75 billion in loans sold to Fannie Mae between January 1, 2000 and December 31, 2008. The loans were sold by Bank of America and its Countrywide Financial unit.
Brian Moynihan, CEO of Bank of America, said that the agreements are a significant step in resolving the bank’s remaining legacy mortgage issues, further streamlining and simplifying the company and reducing expenses over time.
The deal with Fannie Mae is being seen as a positive for Bank of America as it will reduce the provisions the bank has to set aside to cover claims related to mortgages. It will also allow the bank to focus more on growth opportunities.
Since the financial crisis, Bank of America has paid approximately $40 billion for settling claims related to mortgages, the majority of which were sold by Countrywide Financial. Bank of America had acquired Countrywide, which was once the largest subprime lender in the U.S., in order to boost its mortgage business. However, the acquisition has turned to be disastrous for the bank.
Bank of America plans to cover the expenses related to the settlement with Fannie Mae through existing reserves and an additional provision of $260 million (pretax) recorded in the fourth quarter of 2012.
Settlement with Federal Regulators
Separately, 10 U.S. banks, including Bank of America, Citigroup Inc. (NYSE: C), JPMorgan Chase & Co. (NYSE: JPM) and Wells Fargo & Company (NYSE: WFC), reached an $8.5 billion settlement with regulators over unfair foreclosure practices. The settlement replaces a failed process that began in April 2011 in which the Office of the Comptroller of the Currency (OCC) and the Federal Reserve Board (FRB) required 14 mortgage servicers to look into foreclosure from 2009 and 2010. Regulators were concerned that the foreclosure practices during this period harmed millions of borrowers. However, the loan-by-loan review process turned out to be costly and time-consuming and as a result regulators and banks reached a settlement on Monday.
Under the deal, the 10 banks will make a payment of $3.3 billion in cash to 3.8 million borrowers. The borrowers the deal covers could receive amounts from a few hundred dollars to $125,000. The banks also agreed to provide $5.2 billion in foreclosure prevention assistance to borrowers that are at a risk of losing their homes.
Mortgage Settlements to Impact Bank of America’s Q4 Results
The settlement announced on Monday will have an impact on Bank of America’s fourth-quarter results. Bank of America, which reports earnings next week, said that the settlement with Fannie Mae will reduce fourth-quarter pretax income by $2.7 billion. The bank also expects its fourth-quarter results to be negatively impacted by approximately $2.5 billion (pretax) for the independent foreclosure reviews, litigation (mainly related to mortgages), and other matters related to mortgages. Despite these substantial charges, Bank of America expects to report modestly positive earnings per share for the fourth quarter of 2012.
The $8.5 settlement with regulators will also impact other banks’ fourth-quarter results. Banks’ fourth-quarter earnings season will be kicked off by Wells Fargo & Co., which reports results on Friday, January 11, 2013.
Wells Fargo said on Monday that its portion of the cash settlement with OCC and FRB will be $766 million. The company expects to record a pre-tax charge of approximately $644 million in the fourth quarter to fully reserve for its cash payment portion of the settlement and additional remediation-related costs.
Citigroup, which reports earnings on January 17, 2013, said on Monday that it expects to register a pre-tax charge of approximately $305 million in the fourth quarter for its cash payment portion of the settlement. The bank expects to cover its share of the loss mitigation or other foreclosure prevention actions in connection with the agreement through its existing loan loss reserves.
Is it a good time to buy Bank of America?
Bank of America had an excellent run in 2012, along with other major U.S. banks. For the year, Bank of America gained more than 100%, Citigroup gained more than 50%, JPMorgan gained more than 32% and Wells Fargo gained more than 24%.
Bank of America rallied in 2012 despite the problems related to mortgages. The big question is whether the bank can continue to rally this year.
Although Bank of America reached a major settlement with Fannie Mae on Monday, the bank’s mortgage-related problems are not yet over. However, the settlement is a significant step for the bank and ends a great deal of uncertainty. Given these factors, I expect Bank of America to continue its rally in 2013.
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