By David S. Hilzenrath
Washington Post Staff Writer
Monday, January 3, 2011; 7:13 PM
Fannie Mae and Freddie Mac, the financial giants whose failed mortgage investments made them wards of the government, have accepted $2.8 billion from Bank of America to largely put to rest claims that the bank sold them faulty loans.
The cost to Bank of America was less than the potential blow some investors had expected, and the bank's stock rose 6.4 percent on the news Monday.
For Bank of America, the settlements eliminate "a doomsday scenario," said analyst Paul Miller of FBR Capital Markets.
"This is a gift" from the government to the bank, said Christopher Whalen of Institutional Risk Analytics. "We're all paying for this because it will show up in the losses from Fannie and Freddie," he said.
The deal with Fannie Mae is not airtight; it leaves open the possibility that Fannie could pursue additional claims against Bank of America. In contrast, the settlement with Freddie Mac essentially closes the book on pending and potential claims.
The Federal Housing Finance Agency, which oversees Fannie Mae and Freddie Mac, approved the settlements. In a statement, the agency said the deals were "consistent with market practice and FHFA's conservatorship responsibilities."
Fannie spokeswoman Janis Smith called it a "fair and responsible resolution."
At issue is one of the biggest threats facing Bank of America and other major lenders that weathered the financial crisis with help from the government.
During the housing bubble, the banks typically sold mortgages to investors around the world, including Fannie Mae and Freddie Mac. But those investors were generally entitled to repayment by the lenders if the loans were sold on the basis of false assurances.
Stocks of major banks swooned last year when the market was gripped by fears that banks could be on the hook for huge sums.
Bank of America's acquisition of one of the biggest issuers of troubled loans, Countrywide Financial, has left it especially vulnerable.
In October, a group of investors including the Federal Reserve Bank of New York, Pacific Investment Management and BlackRock, wrote to Bank of America signaling that they might try force repayment on pools of Countrywide mortgages totaling more than $47 billion. That dispute remains unresolved.
Another major claim against Bank of America is being pursued in court by MBIA Insurance, which promised to cover payments to investors if borrowers defaulted.
The settlements with Fannie Mae and Freddie Mac were paid Friday, the last day of 2010, as Bank of America closed the books on the year. Without a settlement, investors would have been scrutinizing Bank of America's upcoming fourth-quarter financial report for estimates of the bank's exposure to the two government-backed companies.
Bank of America said its $1.3 billion payment to Freddie Mac extinguishes all outstanding and potential repurchase claims on 787,000 mortgages that had total unpaid principal balances of $127 billion.
The bank's $1.5 billion settlement with Fannie Mae was more complicated. It resolved claims involving 12,045 loans with unpaid balances of $2.7 billion. It partially resolves an additional 5,760 loans with unpaid balances of $1.3 billion.
That still leaves Fannie Mae holding a mountain of loans from Bank of America: the total unpaid balance before the settlement was $397 billion. But Bank of America said that, after making the Dec. 31 payments and reserving $3 billion in the fourth quarter, it has covered any remaining liability to Fannie Mae unless its assumptions about home prices and other factors prove incorrect.
The Bank of America agreement is Fannie Mae's second recent settlement over mortgage issues. On Dec. 27, Ally Financial, formerly known as GMAC, announced that its mortgage unit agreed to pay Fannie Mae $461.5 million to eliminate its liability for loans with unpaid principal of $84 billion. Under that deal, the FHFA agreed to withdraw subpoenas it issued last year in a probe of industry practices.