Bank of America Corp. (BAC), the second largest U.S. lender in terms of assets, agreed to pay Fannie Mae (FNMA.OB) $3.6 billion to resolve home-loan repurchase claims. Bank of America will also pay Fannie Mae $6.75 billion to repurchase residential mortgages that the bank sold to Fannie Mae, including those created and sold by Countrywide Financial Corp., which Bank of America acquired in 2008. The deal involves about 30,000 loans. In addition, BAC will pay $1.3 billion to Fannie Mae to settle loan servicing compensatory fee obligations.
This deal should substantially resolve outstanding claims for compensatory fees from BAC to Fannie Mae. According to Bank of America Chief Executive Officer Brian Moynihan:
"These agreements are a significant step in resolving our remaining legacy mortgage issues, further streamlining and simplifying the company and reducing expenses over time."
Fannie Mae, Freddie Mac and other buyers of mortgages have demanded compensation from Bank of America, and most particularly for loans created by Countrywide Financial Corp, alleging that the loans made with flawed data about the borrowers and properties. Claims allege that Countrywide and its borrowers based these flaws upon fraud. Countrywide was the largest U.S. mortgage lender before the sub-prime mortgage bubble collapsed and the business was sold to Bank of America.
Bank of America's purchase of Countrywide originally praised by federal authorities, but the purchase resulted in BAC essentially buying a bag of losses, regulatory fines and government lawsuits. In retrospect, Bank of America would have likely preferred to then acquire another financial institution or just hold onto its money for its own book of losses.
This agreement with Fannie Mae involves and covers about $300 billion in still outstanding principal on loans sold to Fannie Mae between 2000 and 2008. Bank of America claims the loans involved in the settlement had an aggregate original principal balance of about $1.4 trillion.
Bank of America also noted that it would sell the servicing rights on about $306 billion in other home loans. Nationstar Mortgage Holdings Inc. (NSM) noted that it signed an agreement to acquire $215 billion in residential mortgage servicing rights from Bank of America for about $1.3 billion. This deal is clearly related to BAC's settlement, taking care of about two-thirds of the servicing rights it intends to divest.
Bank of America noted that its fourth-quarter will include some items related to the settlement and other matters, and that it still expects modestly positive earnings for Q4. Nonetheless, the bulk of this settlement will likely be paid within 2013.
Moreover, beyond the massive potential liability most U.S. mega banks have relating to mortgage lending practices, several also have potential exposure to alleged LIBOR (the London inter-bank offered rate) rigging. LIBOR sets payments on many financial instruments, including most standard commercial mortgages and interest rate-based derivatives, and the banks that set LIBOR may have massive liabilities worth hundreds of millions of dollars and possibly totaling tens of billions, if not more, due to rigging the benchmark. Bank of America, Citigroup (C) and JPMorgan Chase (JPM) are the three U.S. banks that are involved in setting LIBOR.
This far, few LIBOR-rigging related settlements have occurred, and none of the U.S. banks have yet resolved their potential exposure to the issue. It was anticipated that some deals would be announced late in 2012 and early in 2013, and some European banks did settle with both European and U.S. regulators in the second half of 2012. The most recent settlement came in December, when UBS AG (UBS) entered a $1.5 billion settlement for manipulation of interest rates and related charges against two former trader-employees.
The UBS settlement was the second in the investigation of global interest rate benchmarks after a Barclays (BCS) settlement in June. Barclays paid about $450 million to settle U.S. and British government agency liability, plus $150 million to its attorneys. The DOJ indicated Barclays was let off easy for cooperating more-so than the other banks, indicating that the settlement rates for the remaining banks, including BAC, C and JPM, may be more in line with UBS' $1.5 billion dollar settlement.
Given this substantial settlement for BAC, much of which should be felt in the first quarter of 2013, and the substantial likelihood that a LIBOR settlement will occur in the first half of 2013, BAC's quarterly results should be rather volatile in the coming quarters, starting off with its Q4 2012 results to be released on January 17. Worse yet, the bank still has a multitude of potential private claim exposure related to both its mortgage and LIBOR issues. With Bank of America appreciating so much in the fourth quarter of 2012, it appears the bank should have trouble maintaining its recent momentum through the first half of 2013.
Disclosure: I am long C.