NEW YORK, N.Y. — Bank of America Corp. has agreed to an $11.7 billion package designed to resolve most disputes with U.S.-owned Fannie Mae over bad mortgages after a deal announced two years ago proved inadequate.
Bank of America will make a $3.6 billion cash payment, spend $6.75 billion to buy back residential loans sold to Fannie Mae, and pay $1.3 billion in fees for taking too long to foreclose on overdue borrowers, according to separate statements. Even after these costs and an additional $2.5 billion for expenses that include litigation and a separate regulatory settlement, the Charlotte, N.C.-based lender said the fourth quarter was “modestly” profitable.
It’s the latest effort by CEO Brian T. Moynihan to cap the damage caused by his predecessor’s takeover of Countrywide Financial Corp. and its defective subprime home loans. Before Monday, the bank committed more than $40 billion since 2007 to cover the costs of refunds and litigation tied to faulty mortgages and foreclosures.
“Together, these agreements are a significant step in resolving our remaining legacy mortgage issues,” Moynihan, 53, said in the bank’s statement. Bank of America is the second-biggest U.S. bank by assets and was the largest U.S. home lender before the 2008 credit crisis.
Bank of America said its deal with Fannie Mae will reduce fourth-quarter profit by about $2.7 billion, most of which is to add to provisions for repurchase demands. Remaining demands tied to repurchases may cost $4 billion more as of year-end 2012, the firm said. Before Monday’s deal, the lender’s previous estimate of remaining costs was $6 billion, indicating the settlement cost the firm more than expected.
Fannie Mae, Freddie Mac and other buyers of mortgages have demanded compensation for loans created by Countrywide, which Bank of America acquired in 2008, claiming the loans were based on flawed data about the properties and borrowers that led to record defaults.
Monday’s agreement covers $300 billion in outstanding principal on loans sold to Fannie Mae between 2000 and 2008. The lender also agreed to sell servicing rights on $306 billion in home loans in separate deals.
As part of the bank’s plan to reduce risk and streamline operations, the company sold mortgage servicing rights covering 2 million loans. Nationstar Mortgage Holdings Inc. said in a statement it will acquire $215 billion in residential mortgage servicing rights for about $1.3 billion. The stock soared as much as 19 percent today.
Bank of America said in January 2011 it was paying $2.8 billion to Freddie Mac and Fannie Mae to settle disputes about mortgages, and that the deals “largely addressed” the liabilities. Fannie Mae’s statement today outlined some exceptions that may not be covered, with Bank of America saying the cost isn’t expected to be material.
The disputes over mortgages and demands for refunds have made investors skeptical about the true value of Bank of America’s assets, with the stock selling at about 92 percent of tangible book value.
“They’re becoming less risky,” said Marty Mosby, an analyst with Guggenheim Securities. “As long as the bank is trading below tangible book value, anything they can do to derisk the balance sheet brings their stock price closer and closer to achieving tangible book value.”