Bank Of America: Have They Just Turned A Corner?

Feb.24.12 | About: Bank of (BAC)

As the major banks continue to clean up their balance sheets, Bank of America (NYSE:BAC) has literally thrown down the gauntlet in it's mortgage business. The recent move by BAC to discontinue writing mortgages with Fannie Mae (FMNA.OB) signals the first major body blow from a giant bank to finally sever its ties with a major part of the mortgage problems of the past. In my opinion this signals a buying signal that cannot be ignored.

While continuing to write loan modifications with Fannie, Bank of America will use other sources to write 1st mortgages from this point. As this New York Times article points out, BAC is saying NO to buying back anymore distressed mortgages that has become a battle with Fannie to continue to accept mortgage paper from BAC (and other banks). Since BAC was Fannie's 3rd largest provider, this has to be seen as a huge step for both Fannie and BAC.

By drawing the line in the sand, BAC is adding another wedge between its "Countrywide" business model", and re-establishing itself in the mortgage business going forward, and is also saying it will not spend anymore money to buy back more of the mortgages that Fannie insists on, capping the already agreed upon amounts.

Bloomberg notes;

"Chief Executive Officer Brian T. Moynihan is seeking to limit additional costs from faulty loans after the 2008 takeover of Countrywide Financial Corp. helped saddle the Charlotte, North Carolina-based bank with about $42 billion in expenses. In November, the lender said it refused to cooperate with what it deemed a new Fannie Mae policy that required loan repurchases if an insurer drops coverage."

BAC insists that its mortgage business will not suffer, as they will turn to Freddie Mac (OTCQB:FMCC) and Ginnie Mae, as well as other sources of liquidity to drive its business. Some might say that Fannie does not care since BAC would still be using Freddie but I don't believe that is the important consideration. Moynihan is basically "cleaning up the Countrywide mess" which is great news for investors in my opinion. Even as the legal battles continue.

The other major step by BAC has made recently has been to freeze pensions and move to 401k plans with some contributions towards those rather than continuing to fund its corporate pension. This action will also save many millions of dollars and further have positive effects on BAC's bottom line.

The Basics

Bank of America Corporation (<a href='http://seekingalpha.com/symbol/BAC' title='Bank of America Corporation'>BAC</a>)
(Click to enlarge)

BAC has shot up this year by approximately 40% and I sold my short term trade position with a 60% profit. My risk basket with BAC for the longer term looks like it will begin to reach new heights with this latest news.

There are plenty of risks out there and the stock is not in my core portfolio, but all of the steps taken, and the latest one being huge in my opinion, gives me further indication that BAC is a bank to own at these levels.

My Opinion

Bank of America is absolutely getting their act together. Every move that Moynihan makes strives towards reducing expenses while at the same time increasing margins as well as the bottom line. Time will tell if all of the actions pay off, but at the current price, BAC seems like a risk/value play that can no longer be ignored.

I will maintain my long term position and adding here might be a profitable move.

Disclosure: I am long BAC.

Disclaimer: Please remember to do your own research prior to making any investment decisions. This article is not a recommendation to buy or sell any securities or stocks, and is the opinion of the author.