Bank of America (BofA) has entered into an $11.6 billion agreement with Fannie Mae to settle the bad loans it sold to the government sponsored enterprise in the form of mortgage-backed securities (MBS). The total settlement includes a cash payment of $3.6 billion made to Fannie Mae.
In addition, the bank must buy back 30,000 risky mortgages, worth $6.75 billion purchased and insured by Fannie. These home loans have a high risk of going into default. The lender also pays the mortgage agency $1.3 billion for failure to deal with foreclosures in a reasonable time frame.
The lender will also sell $306 million in mortgage servicing rights, which puts further distant between the bank and a slew of bad home mortgages. The settlement covers problem loans with a total original value of $1.4 trillion and an outstanding principle balance of $300 billion.
The bank will pay for the settlement from a fund it has set aside for customer losses related to its mortgage bond business. Bank of America will have to add another $2.5 billion to the reserve account to cover the costs.
Bradley Lerman, executive vice president and general counsel of Fannie Mae, states that the mortgage agency “diligently pursued” recompense on the mortgages that did not meet Fannie’s criteria at the time of purchase. “We are pleased to have reached an appropriate agreement to collect on these repurchase requests," said Lerman.
Mortgage-backed securities consist of residential mortgages package and sold as bonds. The MBS purchased by Fannie Mae were mostly backed by home mortgages to subprime borrowers. Between 2000 and 2008, Countrywide Financial originated a majority of the loans.
Bank of America inherited the home loan portfolio of Country Financial –a major player in the subprime mortgage market before the housing collapse. BofA bought the firm in late 2008 for $4 billion.
Heavy losses sustained by Fannie on sour home mortgages required Congress to approve a $116 billion bailout from the government. Since the financial crisis of 2008, Fannie Mae and Freddie Mac have function as the primary players in the residential mortgage market. Together, they manage $5.0 trillion of the $10.5 trillion credit risk that makes up the U.S. residential mortgage market.
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BofA Other Mortgage-Related Losses
According to one analyst, the Fannie Mae settlement could represent the just the beginning of a flood of significant losses from loans sold to private investors. This settlement sits on top of an $8.5 billion settlement, which awaits court approval and may increase. Bank of America wants to resolve cases with private investors like pension funds, hedge funds, and other institutional investors.
The bank also faces a court battle with MBIA. While these cases have to do with the sale of mortgage bonds, BofA is also embroiled in legal actions regarding mortgage servicing and home foreclosures improprieties.
Bank of America recently settled a case with the Federal Reserve and the Office of the Controller, along with JPMorgan Chase, Wells Fargo, and seven other banks. The lenders agreed to pay $8.5 billion to $10 billion to settle a case of performing questionable foreclosures on home owners--BofA will bear most of the costs.
This case came about after a review of foreclosure files found a significant percentage of cases with mishandled foreclosure paperwork. In many foreclosures, the lender missed entire steps in the foreclosure process.