The two Government Sponsored Entities (GSE’s) – Freddie Mac and Fannie Mae will receive $2.6 billion towards claims settlement from Bank of America. Countrywide Financial, a unit of BofA had sold loans to the two GSEs giving incorrect information.
After the subprime crisis had set in, the US treasury had paid $150 billion in rescue money in 2008 to bail out the two entities. Since then both have been trying to force lenders to buy back some of the bad debts since they fell short of underwriting requirements.
In the third quarter BofA received such claims amounting to $12.9 billion – roughly half of which came from GSEs and the remaining from private investors.
BofA shares reacted positively at the news and prices went up about 5.25% in the morning trade.
As per the agreement reached on Monday with Freddie Mac, BofA will pay $1.28 billion towards settlement of 787,000 loans sold in 2008 through Countrywide, against all present and future claims.
BofA will similarly pay $1.34 billion and repurchase 12,045 loans of Countrywide and will settle claims on another 5,760 loans. It has already agreed to settle another $1.52 billion.
Charles Nowski, the CFO of BofA said although Fannie Mae can bring in future claims, the bank has made adequate provisions to settle them.
BofA had made provisions to the tune of $4.4 billion in the third quarter. For the fourth quarter it has set aside $3 billion, which includes the settlement amount of the GSEs and an additional $200 million for other contingencies.
Though analysts are happy since it removes the shadow of uncertainty, many will recast fourth quarter earnings of the bank with lower income projections. BofA will put an additional $2 billion charge on its insurance business and own home loan business due to losses.