Bank of America Corporation (BAC) announced yet another settlement with the Federal Housing Finance Agency (FHFA) – the conservator of government sponsored enterprises (GSEs) Freddie Mac (FMCC) and Fannie Mae (FNMA). This put an end to the long-drawn legal conflict pertaining to the sale of faulty-mortgage backed securities by BofA.
The settlement is worth nearly $9.3 billion and comes as respite for the company, as it removes a significant legal headwind. While BofA will pay $6.3 billion in cash to Freddie Mac and Fannie Mae as compensation, it will buy securities worth more than $3 billion from these GSEs.
The one-time expenses will weigh significantly on the company’s first-quarter 2014 results, as it will likely reduce the after-tax earning per share by 21 cents.
Malpractices in the mortgage industry in the pre-crisis period pushed Freddie Mac and Fannie Mae to the brink of bankruptcy. Finally, these distressed mortgage lenders were bailed out by the U.S. government.
Thereafter, with the tightening of regulations in 2011, the FHFA sued 18 financial organizations including BofA. These organizations had compromised on the quality of loans sold, thereby resulting in huge losses for investors. The taxpayers of the country also had to bear the brunt as they indirectly paid for the bailout.
Actually, the troubles for BofA magnified with the acquisition of Countrywide Financial and Merrill Lynch in 2008. And the company is still paying for it.
As per a Reuters report, BofA recently reached a settlement worth $15 million with New York’s Attorney General Eric T. Schneiderman related to the acquisition of Merrill Lynch. It was alleged that BofA’s shareholders were misled as the bank had covered the towering losses associated with the acquired unit.
Additionally, Kenneth Lewis, the then CEO of BofA, has been charged with a fine of $10 million. As the chief of the company, he was largely responsible for the loss related to the acquisition.
Lewis has also been denied the right to serve as officer or director of a public company for three years. However, his fine will be borne by BofA.
BofA’s after-hours trading on Mar 27 showed positive price movement despite this huge settlement. This is because the Fed’s approval of the company’s capital plan boosted investor sentiment.
Currently, BofA carries a Zacks Rank #4 (Sell). A better-ranked banking major worth considering is Wells Fargo & Company (WFC). It currently has a Zacks Rank #2 (Buy).
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