Bank of America has announced agreements with the Federal National Mortgage Association (Fannie Mae) to resolve outstanding and potential repurchase and certain other claims relating to the origination, sale and delivery of substantially all residential mortgage loans originated and sold directly to Fannie Mae from January 1, 2000 through December 31, 2008 by entities related to Countrywide Financial Corporation (legacy Countrywide) and Bank of America, National Association (BANA).
In addition, Bank of America announced that it signed definitive agreements to sell the servicing rights on 2.0 million residential mortgage loans totaling approximately $306bn, as measured by the aggregate unpaid principal balance (as of November 30, 2012).
'As we enter 2013, we sharpen our focus on serving our three customer groups and helping to move the economy forward', said Bank of America CEO Brian Moynihan. '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'.
Fannie Mae agreements
The agreements with Fannie Mae cover loans with an aggregate original principal balance of approximately $1.4 trillion and an aggregate outstanding principal balance of approximately $300bn. Unresolved claims by Fannie Mae for alleged breaches of selling representations and warranties with respect to these loans totaled $11.2bn of unpaid principal balance at September 30, 2012. These agreements extinguish substantially all of those unresolved claims, as well as any future representations and warranties claims associated with loans sold directly to Fannie Mae from January 1, 2000 to December 31, 2008, subject to certain exceptions which Bank of America does not expect to be material.
As part of the agreement to settle representations and warranties claims, Bank of America will make a cash payment to Fannie Mae of $3.6bn and also repurchase for $6.75bn certain residential mortgage loans sold to Fannie Mae, which Bank of America has valued at less than the purchase price. These actions are expected to be covered by existing reserves and an additional $2.5bn (pretax) in representations and warranties provision recorded in the fourth quarter of 2012.
Bank of America also agreed to make a cash payment to Fannie Mae to settle substantially all of Fannie Mae’s outstanding and future claims for compensatory fees arising out of past foreclosure delays. This payment is expected to be covered by existing reserves and an additional provision of $260 million (pretax) recorded in the fourth quarter of 2012.
Together, these actions described above are expected to reduce Bank of America’s pretax income by approximately $2.7bn in the fourth quarter of 2012.
The Fannie Mae agreement also clarifies the parties' obligations with respect to mortgage insurance, including by establishing timeframes for certain payments and other actions, as well as parameters for potential bulk settlements and by providing for cooperation in future dealings with mortgage insurers.
Through these actions, Bank of America is addressing substantially all of its remaining exposure to repurchase obligations for residential mortgage loans sold directly to Fannie Mae. After giving effect to the settlement agreements with Fannie Mae announced today, the company expects to reduce the range of possible loss above existing accruals for both GSE and non-GSE representations and warranties exposures to up to $4.0bn at December 31, 2012, compared to up to $6.0bn at September 30, 2012.
Sale of mortgage servicing rights
Bank of America also announced that it signed definitive agreements with two different counterparties to sell the servicing rights on certain residential mortgage loans serviced for Fannie Mae, the Federal Home Loan Mortgage Corporation (Freddie Mac), the Government National Mortgage Association (Ginnie Mae), and private label securitizations, with an aggregate unpaid principal balance of approximately $306bn. Transfers of servicing rights are subject to the approval or consent of certain third parties.
The sales involve approximately 2.0 million loans currently serviced by Bank of America, including approximately 232,000 loans classified as 60+ day delinquent first mortgage loans.
Prior to the above transactions, the number of loans classified as 60+ day delinquencies was approximately 775,000 loans as of December 31, 2012, down from 936,000 loans at September 30, 2012. Upon completion of these servicing transfer transactions, the number of 60+ day delinquent first mortgage loans serviced by Bank of America is expected to further decline substantially.
The transfers of servicing rights are scheduled to occur in stages over the course of 2013. The transactions are expected to have a benefit over the book value of the mortgage servicing rights of approximately $650m; about one-half of this amount is expected to be recorded in the fourth quarter of 2012 related to valuation adjustments to the MSR asset, with the balance expected to be recorded in future periods at the time of servicing transfers.
'We are resolving legacy mortgage issues while balancing the needs of our customers, mortgage investors, our shareholders and communities. The sale of mortgage servicing rights to highly rated specialty servicing companies is an important step in that process', said Ron Sturzenegger, Legacy Asset Servicing executive for Bank of America. 'Bank of America will work closely with our customers, buyers and the investors who own the loans to ensure a smooth transition to their new servicer. Importantly, each of these specialty servicers has committed to adhere to the same servicing standards as provided under the National Mortgage Settlement'.