In its quarterly earnings filing with the Securities and Exchange Commission (SEC), Bank of America Corporation (BAC) stated that the liabilities for mortgage repurchase claims from the two Government Sponsored Enterprises (GSEs) – Freddie Mac (FMCC) and Fannie Mae (FNMA) – could get larger than expected.
According to BofA the increase in liabilities is mostly due to the rigid stance taken by Fannie and Freddie. Also, these two GSEs are sending back more repurchase claims than previously anticipated by the company.
During 2004–2008, BofA sold loans of nearly $1.1 trillion to these two GSEs. However, as of June 30, 2011, about $121 billion or 11% of these loans have defaulted or are at least 180 days past due.
Furthermore, as per the quarterly earnings filings, BofA received $27.7 billion in claims and resolved $22 billion of these, leading to a net loss of approximately 30%. The company also stated that cumulative GSE representations and warranties losses as of June 30, 2011 stood at $7.8 billion ($2.8 billion as of December 31, 2011 and $5.0 billion for six months ended June 30).
Additionally, BofA commented that it expects many more litigations as the company would be unable to resolve these repurchase claims with the mortgage insurance companies before the expiration of the appeal period allowed by Fannie. Hence, this would lead to higher representations and warranties costs going forward.
In January, BofA agreed to pay $2.62 billion to Freddie Mac and Fannie Mae to resolve the repurchase claims related to certain residential mortgage loans sold to these GSEs by Countrywide Financial Corporation. Countrywide was acquired by BofA for approximately $4 billion in 2008.
The repurchase claims problem ensued from the housing boom when the lenders (banks), who originated loans, sold them to Freddie and Fannie or to private investors as mortgage-backed securities (MBS). However, when the housing bubble burst, a large number of these loans and MBS turned bad. And recently, Freddie, Fannie and other investors are asking banks to repurchase these loans at the original value.
BofA’s recent payments to settle mortgage-related claims and higher-than-anticipated repurchase claims will put substantial pressure on the company’s financials. Additionally, revenue headwinds and issues related to the U.S. regulatory reform continue to restrict the company’s future earnings. However, the company is poised to benefit from its large-scale operations, its efficiency initiative program and improving credit quality.
Currently, BofA’s shares maintain a Zacks #4 Rank, which translates into a short-term ‘Sell’ rating. However, considering the company’s fundamentals, we have a long-term "Neutral" recommendation on the stock.
BANK OF AMER CP (BAC): Free Stock Analysis Report
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FANNIE MAE (FNMA): Free Stock Analysis Report
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