BofA Starts Mortgage Cleanup Mess, For $3 Billion (BAC)

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Bank of America Corporation (NYSE: BAC) was just listed this morning as one of the six DJIA components with the most implied upside in 2011 this morning, and part of that is already being realized on the first day of the year.  The bank is taking what may be the first of several steps that will ultimately lead to a cleaning up of its mortgage woes.  Technically this is not the first step and this won’t likely be the last step with outside parties, even if this is said to clean up the Government Sponsored Entity issues.  The bank has signed agreements with Fannie Mae (FNMA) and Freddie Mac (FMCC) to resolve repurchase claims involving certain residential mortgage loans sold to them under Countrywide.  The agreement provides for a cash payment to Freddie Mac of $1.28 billion and a net cash payment to Fannie Mae of $1.34 billion, both of which were made on December 31, 2010.

As a result, the bank will take a provision of approximately $3 billion related to repurchase obligations for residential mortgage loans sold by Bank of America affiliates directly to Freddie Mac and Fannie Mae. This covers the representations and warranties liability for other loans sold directly to Fannie and Freddie and not covered by these agreements. The loans not covered by the agreements include both legacy Countrywide loans and loans originated on other legacy platforms.

Bank of America noted that it believes that it has now addressed its remaining exposure to repurchase obligations for residential mortgage loans sold directly to Fannie and Freddie.

The Fannie Mae agreement extinguishes all outstanding and potential selling representations and warranties claims on 12,045 legacy Countrywide loans (approximately $2.7 billion of unpaid principal balance). The agreement also resolves specific outstanding repurchase or make-whole claims, or extends the cure period for missing documentation-related claims, on an additional 5,760 legacy Countrywide loans (approximately $1.3 billion of unpaid principal balance).  The agreements with Freddie Mac and Fannie Mae do not cover loan servicing obligations, other contractual obligations or loans contained in private label securitizations.

Bank of America expects to record a non-cash, non-tax deductible goodwill impairment charge of approximately $2.0 billion in the fourth quarter of 2010 in its Home Loans and Insurance business segment.

The charges may sound severe, but this is a repairing and healing move.  Whether this is the last settlement related to mortgages is up for debate.  The market is rewarding Bank of America as shares are indicated up 3.4% at $13.75.

JON C. OGG