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Bank of America will take a $3 billion fourth-quarter charge stemming from settlements with Freddie Mac and Fannie Mae over poorly underwritten mortgages the bank sold to the GSEs.
January 3
It is now clear that Fannie Mae and Freddie Mac are willing to make peace with banks by settling mortgage repurchase claims for some cash.
But it remains to be seen whether institutions that are in better financial shape than Bank of America Corp. or Ally Financial Inc. will accept the government-sponsored enterprises' olive branches.
B of A announced Monday that it had reached separate settlements with Fannie and Freddie over dicey loans that the bank's Countrywide unit had sold to the GSEs during the housing boom.
The Charlotte, N.C., company agreed to pay $1.28 billion to Freddie and $1.52 billion to Fannie. As a result of the deals, B of A said it would set aside $3 billion for the fourth quarter — enough to cover both the cost of the settlements and its remaining exposure to GSE losses, the company said.
News of the agreements came after Ally Financial Inc. announced last week that it had agreed to pay $465.1 million to resolve all mortgage repurchase liabilities with Fannie Mae. The auto and mortgage lender, formerly known as GMAC, had announced a similar deal with Freddie in March.
Given that context, some analysts were hopeful that the B of A settlements were harbingers of agreements to come between GSEs and other lenders, which would help remove a burden that has been weighing on the industry for several years.
Yet while Fannie and Freddie need to save money for taxpayers, B of A and Ally also had strong motivations to come to the table — motivations that may not carry over to their competitors.
"I don't think this means banks will line up to settle with the GSEs," said Christopher Mutascio, a managing director at Stifel Financial Corp. Stronger banks like Wells Fargo & Co. (the No. 2 servicer behind B of A, according to National Mortgage News) and JPMorgan Chase & Co. (No. 3) "will keep fighting tooth and nail," he said.
Wells, for example, could argue that it was a stronger underwriter, Mutascio said.
The San Francisco banking company would not discuss the issue of put-backs Monday, citing a quiet period before it reports fourth-quarter results.
"B of A was more at risk," Mutascio said. "Countrywide was an awful underwriter, so I don't know if there's the pressure on the other lead underwriters to get themselves out of this mess."
Bose George, an analyst at Keefe, Bruyette & Woods, agreed there were specific reasons both Ally and B of A agreed to the settlements.
"Ally could be trying to do an initial public offering this year" to repay its government capital, "so they wanted to get those claims settled," George said. "And B of A was under a cloud on this."
Still, George said he's assuming that "now these agreements are out there, there will be more."
Still others think the political necessity of restructuring Fannie and Freddie will hold sway.
"It wouldn't surprise me if more settlements come down the road, and it would help from a regulatory issue to show recoveries for losses," said Chris Gamaitoni, an analyst at Compass Point Research and Trading LLC.
While B of A's deal with Freddie resolves all outstanding and potential claims related to loans sold by Countrywide (which the bank bought in 2008), the agreement with Fannie was far more limited and did not include future buyback requests.
"In the case of Fannie, we had accumulated a fairly substantial pipeline and it was their interest to clear out that pipeline," said Charles Noski, Bank of America's chief financial officer, on a conference call Monday. "And so we really never got to a discussion with Fannie about the kind of global settlement that we did with Freddie."
Gamaitoni said he expects B of A will be hit with another $5.5 billion in losses from Fannie, which would be above its current reserves.
He said B of A's agreement with Fannie indicated "slightly higher" losses than B of A originally anticipated. He estimated that B of A will ultimately pay between $9.4 billion and $11.8 billion in total cumulative repurchase losses to the GSEs.
Operational differences may account for the disparity in B of A's agreements with Fannie and Freddie, Gamaitoni said.
Fannie has a higher default rate, of 3.03%, compared with Freddie's 2.05%, and also has a higher repurchase request rate.
"The payments were fair and in line with expectations, but some people are misunderstanding it because Fannie Mae did not settle, so it's not off the table for Fannie," Gamaitoni said. "They dealt with just the pipeline of long-standing requests that they wanted resolved."
Paul Miller, managing director of FBR Capital Markets, said he estimates that B of A's total losses related to the GSEs will ultimately add up to about $9 billion, which includes the $3 billion that B of A set aside to cover the GSE settlements and future Fannie claims.
B of A's $1.28 billion cash payment to Freddie resolved claims on 787,000 in loans originated and sold by Countrywide before 2009. The loans had a total outstanding unpaid principal balance of $127 billion.
By comparison, B of A paid Fannie a total of $1.34 billion (net of certain credits) to resolve repurchase claims on 17,805 loans with an unpaid balance of about $4 billion.
B of A also still faces potential litigation from investors holding soured private-label mortgage-backed securities from Countrywide. The company would not discuss potential settlements with those bondholders Monday. Analysts were divided on whether there will be a quick resolution to the private-label claims, which generally have a higher burden of proof than the GSEs' repurchase demands.
Mutascio said he also expects banks to fight repurchase requests from private-label investors, because unlike the GSEs, those investors have to prove that the underwriting deficiency actually led to the borrower's default.
"We will see the banks be more aggressive on the private-label side because there is a higher burden of proof," he said.
Like Ally, B of A did not pay any penalty for the foreclosure process errors that surfaced this past fall in its deal to extinguish liabilities with the GSEs.
"This agreement does not address the private-label market or robo-signing or any of the foreclosure issues about having the right documentation," Miller said. "But I think this was a good deal for everybody, because B of A can put hard numbers around these liabilities, and other banks can, too. You would hope this would pave the way for more settlements."
