Bank of America said it agreed to pay Fannie Mae and Freddie Mac $2.8 billion to settle claims that it sold the mortgage finance companies bad home loans.
Bank of America shares climbed 4.5 percent in early trading Monday. Analysts said many investors had worried the bank would have to buy back billions of dollars of home loans it sold to investors at the height of the housing boom.
“This takes away a nice headline risk” for Bank of America, said Alan Villalon, a senior bank analyst at Chicago-based Nuveen Investments.
The agreement with Fannie and Freddie resolves the bulk of the bank’s exposure to those government-sponsored enterprises (GSEs), but it still faces potential liabilities from mortgages it sold to private investors.
Mortgage investors say the home loans should never have been sold to them in the first place because they did not meet investors’ underwriting requirements.
Bank of America said it made a $1.28 billion cash payment to Freddie Mac as part of an agreement to end all claims through 2008 related to mortgages sold by Countrywide, a mortgage company bought by the bank in 2008.
The bank paid Fannie Mae $1.34 billion in cash and applied certain credits to reach an agreed $1.52 billion settlement on 12,045 Countrywide loans.
Bank of America said it would reserve $3 billion in the fourth quarter related to the Fannie and Freddie claims and expects to record a goodwill impairment charge of $2 billion in the quarter in its home loans and insurance business unit.
BofA Chief Financial Officer Charles Noski said in a conference call with analysts that the bank does not expect to add to the reserve for additional repurchase requests from Fannie or Freddie in the future, though the agreement only covers loans originated by Countrywide.
The bank estimates it will have $2.7 billion in outstanding repurchase requests from Fannie and Freddie not covered by the settlement. Noski said this includes $832 million of requests due to incomplete documentation that can be resolved without large losses to the bank.
In October, BofA said it was two-thirds of the way through its GSE-owned mortgage repurchases and had bought back $11.4 billion in mortgages from Fannie Mae and Freddie Mac.
