By Joe Rauch
CHARLOTTE, North Carolina (Reuters) - Bank of America Corp said it agreed to pay Fannie Mae and Freddie Mac $2.8 billion to settle claims that it sold the mortgage finance companies bad home loans.
Bank of America shares climbed 4.5 percent in early trading Monday. Analysts said many investors had worried the bank would have to buy back billions of dollars of home loans it sold to investors at the height of the housing boom.
"This takes away a nice headline risk" for Bank of America, said Alan Villalon, a senior bank analyst at Chicago-based Nuveen Investments.
The agreement with Fannie and Freddie resolves the bulk of the bank's exposure to those government-sponsored enterprises (GSEs), but it still faces potential liabilities from mortgages it sold to private investors.
Mortgage investors say the home loans should never have been sold to them in the first place because they did not meet investors' underwriting requirements.
Bank of America said it made a $1.28 billion cash payment to Freddie Mac as part of an agreement to end all claims through 2008 related to mortgages sold by Countrywide, a mortgage company bought by the bank in 2008.
The bank paid Fannie Mae $1.34 billion in cash and applied certain credits to reach an agreed $1.52 billion settlement on 12,045 Countrywide loans.
Bank of America said it would reserve $3 billion in the fourth quarter related to the Fannie and Freddie claims and expects to record a goodwill impairment charge of $2 billion in the quarter in its home loans and insurance business unit.
BofA Chief Financial Officer Charles Noski said in a conference call with analysts that the bank does not expect to add to the reserve for additional repurchase requests from Fannie or Freddie in the future, though the agreement only covers loans originated by Countrywide.
The bank estimates it will have $2.7 billion in outstanding repurchase requests from Fannie and Freddie not covered by the settlement. Noski said this includes $832 million of requests due to incomplete documentation that can be resolved without large losses to the bank.
In October, BofA said it was two-thirds of the way through its GSE-owned mortgage repurchases and had bought back $11.4 billion in mortgages from Fannie Mae and Freddie Mac.
SETTING PRECEDENTS
Fannie Mae said in a statement that the agreement with Bank of America addresses about 44 percent of its $7.7 billion in outstanding repurchase requests at the end of September.
The agreement is similar to but much larger than a recent $462 million settlement between Ally Financial Inc and Fannie Mae.
The regulator for Fannie Mae and Freddie Mac, the Federal Housing Finance Agency, suggested other banks may be forced to follow suit.
"While these agreements are an important step, the Enterprises (Fannie Mae and Freddie Mac) have other outstanding claims across a range of counterparties and they are being pursued," said Edward DeMarco, acting director of the FHFA.
As the largest mortgage servicer in the United States, Bank of America has been at the center of the multi-year foreclosure crisis. The agreement with Fannie and Freddie is not the end of the problem.
"This doesn't get the bank completely out of trouble. They're still going to face litigation on repurchases from private-label investors," said Chris Whalen, senior vice president and managing director of Institutional Risk Analytics.
But Villalon said the agreement with Fannie and Freddie could set a precedent in the bank's negotiations with private investors, since the GSEs had stricter underwriting standards.
The bank started negotiating with a group of mortgage investors last month in an apparent shift in its stance toward such claims. Previously, the bank vowed to fight these investors.
In October, Bank of America Chief Executive Brian Moynihan said the bank would fight back against investors whose attitude was: "I bought a Chevy Vega but I want it to be a Mercedes."
In 2008, it bought Countrywide for $4 billion, a move that has since plagued the bank's balance sheet with billions in problem mortgages.
In October, the bank briefly halted foreclosures amid industrywide allegations that lenders had cut corners on documentation in home repossessions.
The bank has since partially restarted foreclosure proceedings in 23 U.S. states.
(Reporting by Elinor Comlay in New York and Joe Rauch in Charlotte; additional reporting by Maria Aspan in New York, Editing by John Wallace)
