After resisting the government-sponsoredr03; enterprises' loan repurchase demands all through 2012 and seeing its mortgage operations partially crippled as a result, Bank of America on Monday announced an agreement covering $1.4 trillion in loans sold to Fannie Mae through 2008.
Bank of America will pay Fannie $3.6 billion in cash and a further $6.75 billion to repurchase about 30,000 mortgage loans.
These outlays will be covered by existing mortgage reserves, along with "an additional $2.5 billion (pretax) in representations and warranties provision recorded in the fourth quarter of 2012," according to the agreement.
Bank of America's shares were up slightly in morning trading, but down nearly 0.66% by midday.
The bank agreed to "settle substantially all of Fannie Mae's outstanding and future claims for compensatory fees arising out of past foreclosure delays," which is "expected to be covered by existing reserves and an additional provision of $260 million (pretax) recorded in the fourth quarter of 2012."
The settlement will lower Bank of America's fourth-quarter pretax earnings by $2.7 billion, and the company also said that its fourth-quarter results would be "negatively impacted by approximately $2.5 billion (pretax) for the independent foreclosure reviews, litigation (primarily mortgage-related), and other mortgage-related matters."
Factoring in a $1.3 billion tax benefit from the recognition of foreign tax credits, a benefit from the sale of mortgage servicing rights and "approximately $700 million of pretax negative debit valuation adjustments (DVA) and fair value option (FVO) adjustments related to the continued improvement in the company's credit spreads," the company expects "earnings per share to be modestly positive for the fourth-quarter of 2012."
Fannie Mae and its sister company Freddie Mac (FMCC +0.35%) were taken under government conservatorship in September 2008. Fannie said in a filing that the $10.3 billion payment by Bank of America and associated agreements address "substantially all of our outstanding repurchase requests made to Bank of America. As of September 30, 2012, $10.8 billion, or 67%, of our $16.2 billion in outstanding repurchase requests to all our mortgage seller/servicers, as measured by unpaid principal balance, had been made to Bank of America. Accordingly, the amount of our outstanding repurchase requests will decrease substantially in the first quarter of 2013 as a result of the resolution agreement."
The huge settlement with Fannie Mae doesn't end Bank of America's mortgage saga, however. The company said it "expects to reduce the range of possible loss above existing accruals for both GSE and non-GSE representations and warranties exposures to up to $4.0 billion at December 31, 2012, compared to up to $6.0 billion at September 30, 2012."
In its announcement, Bank of America also said that Fannie Mae, along with Freddie Mac and Ginnie Mae, had agreed with its plan to sell servicing rights on 2 million residential mortgage loans, with an unpaid balance of $306 billion. About 232,000 of the loans for which servicing rights will be transferred are past due 60 days or more.
The company said that the transfer of mortgage servicing rights will "occur in stages over the course of 2013," and that the transfers are expected to "have a benefit over the book value of the mortgage servicing rights of approximately $650 million," with about one half of the benefit being booked in the fourth quarter.
Meanwhile, Walter Investment Management (WAC -1.38%) announced that it had agreed to acquire servicing rights for about 650,000 loans with unpaid balances totaling $93 billion from Bank of America for $519 million, with the transfers taking place during the first and second quarters.
Also on Monday, Nationstar Mortgage (NSM -0.72%) announced an agreement to buy servicing rights for 1.3 million mortgage loans with unpaid balances totaling $215 billion, for $1.3 billion.
Bank of America said nothing about its expected cost savings from the sale of mortgage servicing rights, but there was a silver lining in the press release, underlining the housing recovery in the United States: "Prior to the above transactions, the number of loans classified as 60+ day delinquencies was approximately 775,000 loans as of Dec. 31, 2012, down from 936,000 loans at Sept. 30, 2012."
CEO Brian Moynihan said that the company was working to "sharpen our focus on serving our three customer groups and helping to move the economy forward," and that the agreements with Fannie Mae "are a significant step in resolving our remaining legacy mortgage issues, further streamlining and simplifying the company and reducing expenses over time."
Guggenheim Securities analyst Marty says that with today's announced deal with Fannie Mae, Bank of America "can clean the slate" and "start looking" to resume the sale of newly originated mortgage loans to Fannie Mae. Discussing Bank of America's sale of mortgage servicing rights, Mosby says that "what they are trying to do get to the point where a lot of these legacy issues are resolved," with the bulk of the company's mortgage mess springing from its purchase of Countrywide Financial in 2008. "We are not quite there yet, but this is a step in the right direction."
Mosby points out that Bank of America isn't really losing $6.75 billion on the mortgage repurchases, because the company is getting those loans back from Fannie, and "typically you take a 50% loss" on troubled loans of that type.
When discussing the anticipated expense savings from the decline in mortgage workout costs following the transfer of the servicing rights, Mosby says "we don't really think that kicks in until the back end of 20013 and into 2014."
Mosby rates Bank of America a "buy," with a $14 price target. The analyst says that "the market is getting more comfortable pushing the stock price up to its tangible book value," which was 13.48 a share as of Sept. 30, according to the company. "We anticipated that they would be able to cover future losses with earnings, rather than capital, which is why we had our target priced pegged to tangible book value."