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With Fannie Deal, B of A Seeks to Finally Turn Corner

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It's become a ritual of sorts. In advance of its next earnings report, Bank of America (BAC) settles a bundle of nagging legal claims, vowing that it's leaving its problems in the past.

In May 2012, it was $330 million in mortgage buybacks from Freddie Mac. Four months later, it was a $2.4 billion settlement with investors upset about B of A's acquisition of Merrill Lynch.

And on Monday, in the largest of these announcements to date, the Charlotte bank said it would pay $11.6 billion to Fannie Mae to settle a range of disputes — involving, most notably, soured mortgages that B of A inherited in its ill-conceived acquisition of Countrywide, as well as certain mortgage servicing obligations.

Now the question for B of A is: when does it end?

David Trone, an analyst at JMP Securities, wrote in a research note that B of A's "financial penance for legacy issues will continue, in our view." Disputes over the quality of private-label mortgage securities are slower to develop than those involving Fannie and Freddie, he argued, saying that he expects to continue to see such cases over the next couple of years.

"These types of kitchen-sinks suggest that the problem is over," Trone wrote, referring to Monday's announcement, "but as we've seen, the mortgage mess lingers on and on."

Some analysts were more upbeat about the implications of the settlement.

The deal includes a $3.55 billion payment to Fannie over troubled mortgages, a $1.3 billion payment related to mortgage servicing issues, and $6.75 billion in mortgage repurchases by the bank. B of A expects to cover the expenses with existing reserves and an additional $2.5 billion provision in the fourth quarter of 2012.

The ratings agency Fitch said the $11.6 billion in payments are "very manageable" for B of A, and they should allow the nation's second-largest bank to begin moving beyond its mortgage woes.

"Fitch believes that a large portion of the uncertainty regarding [Bank of America's] potential future liabilities, which under an extreme stress scenario Fitch noted could be as high as $20 billion, has been reduced," the rating agency said in a news release.

"That said, since … [the bank] does still have some remaining litigation risks to other parties, Fitch would still expect some additional costs going forward."

Marty Mosby, an analyst with Guggenheim Securities, was also upbeat, though he estimated that it will take the bank another 12 months to resolve most of its lingering problems.

"It's another step in Bank of America's recovery," he said. "What we're seeing is with each of these announcements, Bank of America is working through another part of the Countrywide problems."

B of A's fell 0.2% Monday, to $12.08, suggesting that investors had largely built the settlement into their view of the stock.

In a news release Monday, Chief Executive Officer Brian Moynihan hailed the agreements with Fannie Mae, saying: "Together, these agreements are a significant step in resolving our remaining legacy mortgage issues, further streamlining and simplifying the company and reducing expenses over time."

That comment was strikingly similar to the statement Moynihan made in January 2011, when the bank announced that it was paying $2.5 billion to Fannie and Freddie to buy back mortgages and to resolve claims related to its Countrywide portfolio.

"These actions resolve substantial legacy issues in the best interest of our shareholders," Moynihan said in a statement at that time.

As it turned out, the claims resolved in early 2011 were just the tip of the iceberg. But this agreement between B of A and Fannie appears to be different, said Paul Miller, an analyst with FBR Capital Markets.

"Last time they did this, they said they cleaned the decks, and they didn't," Miller said. "This time it looks like they did."

B of A said that as of Sept. 30, 2012, Fannie Mae had unresolved claims against it on loans totalling $11.2 billion. It stated that Monday's agreements resolve "substantially all of those claims," as well as most future claims related to loans it sold directly to Fannie between 2000 and 2008.

The bank still faces substantial legal risks stemming from the financial crisis.

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Comments (1)
OK, so they are on their way after clearing a path through Fannie and Freddie MBS buy back issues. The question then becomes where are hey in relation to buy back requests from Private Investor MBS?
Posted by robrose | Tuesday, January 08 2013 at 1:48PM ET
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