Bank of America is settling some buyback claims on bad home loans sold to Fannie Mae and Freddie Mac as it attempts to separate itself further from one of the housing downturn's biggest headaches.
The largest U.S. bank also said Monday that the Federal Reserve has confirmed it no longer has any obligations under the government's Troubled Asset Relief Program, as it made good on a promise to increase equity by $3 billion.
Bank of America's deal with Fannie Mae and Freddie Mac are linked to Countrywide Financial residential mortgage loans. Bank of America purchased Countrywide in July 2008. But Countrywide spiraled downward during the financial crisis when it became clear many of its borrowers wouldn't be able to repay mortgages that had required no proof of income or down payment, and contained adjustable rates that quickly made monthly payments unaffordable.
As part of the settlements, Bank of America on Friday made a $1.34 billion cash payment to Fannie Mae and a $1.28 billion payment to Freddie Mac. Chief Financial Officer Charles Noski estimates that the agreements reached with the companies leaves Bank of America with approximately $2.7 billion in outstanding claims for Fannie Mae and Freddie Mac.
Bank of America said it will take a fourth-quarter impairment charge of about $2 billion.
Noski described the deal with Freddie Mac as more of a global settlement that includes future claims, while the agreement with Fannie Mae specifically relates to the existing pipeline and does not cover future claims.
Buyback claims are an ongoing issue for the financial industry, with Ally Financial announcing last week that it would pay $462 million to settle buyback claims on $292 billion in home loans that it sold to Fannie Mae.
And in mid December, a group of eight investors including Freddie Mac, Pimco Investment Management, Blackrock Financial Management and the Federal Reserve Bank of New York extended talks with Bank of America over the group's demands that the bank buy back soured mortgages sold to them.
The investors argue that Countrywide's practice of modifying loans found to have faulty paperwork or those written outside of normal underwriting standards breached signed agreements with the investors. By continuing to service bad loans rather than speeding up foreclosures, the group claims, Countrywide ran up servicing fees, enriching itself at the expense of investors.
Bank of America, however, has described the loan modifications as the "proper response to an unprecedented housing crisis and in furtherance of the stated policy of the federal government."
The deals with Freddie Mac and Fannie Mae don't cover loan servicing obligations, other contractual obligations or loans contained in private label securitizations. But the agreements are a sign that the bank is working quickly on buyback claims.
"These actions resolve substantial legacy issues in the best interest of our shareholders," Bank of America chief executive Brian Moynihan said in a statement.
Fannie Mae said in a statement that the Bank of America deal was a "fair and responsible resolution" of the outstanding claims.