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Bank of America (NYSE:BAC) has agreed to pay $10.35 billion USD to settle claims for loans originated by the bank and sold to Fannie Mae between 2000 and 2008.
The loans in question were actually originated by Bank of America N.A. and Countrywide Financial, which Bank of America acquired in 2008. $3.6 billion of the total amount will be used to settle claims related to residential home loans now held by Fannie Mae. $6.75 billion will be used by Bank of America to buy back some 30,000 mortgages that should have been considered toxic when they were originally sold to Fannie Mae.
Fannie Mae is a US Government sponsored enterprise (GSE) that securitises mortgages in the form of mortgage-backed securities. This allows the original lender to reinvest in more lending, keeping more lenders in the game.
Following the buy-back, Bank of America plans to sell mortgage servicing rights on two million residential mortgage loans with some $306 billion in principle outstanding. The rights will be sold in stages throughout 2013.
What we are looking at here is a reparation payment for Bank of America’s part in the 2008 financial crisis. At the time, the practice of bundling loans together and selling them as investments had become popular. However, when more and significantly more homeowners began defaulting when the housing bubble burst, altogether too many of the investments became of little or no value.
This writer has always been of the opinion that the Countrywide acquisition was part of a scheme of the Bank of America execs in which they were able to eliminate a pesky competitor and use the opportunity to sell off the newly acquired loan packages at a substantial profit. Although the bank advertised it as an opportunity to leverage the synergies of the two companies, it was apparent from the start that they had no synergistic plan. It appeared at the time, post-acquisition, that, even at a local and regional level, the bank was tripping all over itself to try to make something that, in reality, had very little synergy, work as though it synergies were abundant. Which begs the question, “What was that acquisition really about?” It certainly wasn’t synergy. I continue to believe that it had more to do with fast money.
So, now that the birds have come home to roost five years later, everyone is putting on their smiling faces and saying “We’re glad to get this behind us.” That’s really cool. If you are a banker. I wonder what all the people who lost their homes would say.
Bank of America has warned that it expects its fourth quarter income to be reduced by about $2.7 billion.
