Bank of America ($12.11 0%) announced a multibillion-dollar mortgage settlement deal with Fannie Mae Monday morning to resolve legacy mortgage repurchase claims through a $3.6 billion cash payment to the GSE. In addition, BofA said it would buy back $6.75 billion in residential mortgages sold to Fannie Mae.
The agreement is a big step in allowing the mega bank to distance itself from legacy mortgage issues that grew all the more extreme after its acquisition of Countrywide.
BofA said the loans in the deal are valued at less than the purchase price.
BofA will use existing reserves and a $2.5 billion representations and warranties provision recorded in the fourth quarter of last year to cover the settlement.
The agreement covers loans with a $1.4 trillion unpaid principal balance and resolves remaining compensatory fees.
The entire deal covers repurchase and originations claims tied to loans originated and sold to Fannie Mae from Jan. 1 2000 through Dec. 31, 2008. Many of the loans tie back to Countrywide Financial Corp., which was acquired by BofA in the wake of the financial crisis.
Disputes on the quality and performance of the mortgages grew tense between the two financial giants. In February of last year, business in this regard came to a standstill between the two.
BofA also agreed to sell the servicing rights to two million mortgage loans, which carry a total unpaid principal balance of $306 billion. BofA has already signed definitive agreement with two counterparties for those rights. Those parties have been identified as Nationstar Mortgage Holdings and Green Tree Servicing.
The MSR sale includes 232,000 loans that are already 60-days past due. The transfer of the MSRs will occur in stages over the course of this year.
“Together, these actions described above are expected to reduce Bank of America’s pretax income by approximately $2.7 billion in the fourth quarter of 2012,” BofA said in a statement.
At the same time, the deal resolves putback claims, ends major issues related to mortgage insurance and allows BofA to address any remaining exposures tied to its sale of mortgages to Fannie Mae.
The Federal Housing Finance Agency, as conservator for Fannie and Freddie, approved the agreement and accepted transfer of the mortgage servicing rights to specialty servicers.
“Resolving these issues at this time is in the best interest of taxpayers and reduces uncertainty in the nation’s mortgage finance market,” said Edward J. DeMarco, FHFA Acting Director. “This is a major step forward in resolving issues from the past and providing greater certainty in the marketplace, which remain critical FHFA goals as conservator. I am pleased with the resolution achieved and thank everyone involved for their efforts.”