Bank of America Provisions $1 Billion For Reps & Warranties Liability In Q1 As Claims Jump By $2.9 Billion, Pays Monoline AGO $1.1 Billion To Settle

Tyler Durden's picture

Bank of America continues crawling along the razor's edge, with the biggest threat to its continued business model: ongoing legacy CFC fraud being largely unprovisioned for. In the just released earnings presentation, we learn that the bank provisioned only $1 billion for its ongoing Reps and Warranties liability, after charging off a minuscule $238 million - the lowest in over a year, bringing its total liability accrual to $6.2 billion. Yet over the same period total outstanding claims by counterparty surged by nearly 30%, from $10.7 billion to $13.6 billion, primarily due to GSEs, although the steady putback rise in monoline GSE claims is relentless (and appears to have gotten to the bank considering the just announced Assured Guaranty settlement, see below). Total outstanding claims at the end of Q1 totalled $13.6 billion. Also someone please explain to us how Merrill Lynch (see footnote
2) is one of the parties responsible for filing new claims against its
parent and rescuer Bank of America.
As for a real world example of just what the real cost of these
liabilities is in a full discharge scenario, we have the just announce
settlement with Assured Guaranty which cost the company $1.1 billion to
settle loss-sharing reinsurance arrangement on 21 first
lien RMBS transactions totalling $4.8 billion net par. In other
words the settlements that are about to be announce with MBIA and other
monolines could possibly be in the double digits, crushing BAC's earnings in whatever quarter they are announced.

Fom BofA's commentary on the topic:

  • 1Q11 reps and warranties provision of $1.0B is $3.1B lower than 4Q10, as that quarter included a $3.0B provision related to the agreements with GSEs
  • Outstanding claims increased $2.9B. The increase in the outstanding GSE claims is primarily attributed to an increase in new claims submitted on both Countrywide originations not covered by the GSE agreements and Bank of America originations compared to 4Q10, combined with an increase in the volume of claims appealed by the company and awaiting review and response from the GSEs
  • Rescissions and approvals in 4Q10 were primarily driven by GSE agreements

It should not be forgotten that with the taxpayer funded GSEs being the biggest variable in whether or not BAC is insolvent, it was none other than former Bank of America General Counsel Tim Mayopoulos who is currently GC at Fannie, and decided to recuse himself from the settlement which whacked so much in potential reps and warranties claims. One continues to wonder what Tim's award for betraying taxpayers was in this case.

As for a real world example of just what the real cost of these liabilities is in a full discharge scenario, we have the just announced settelement with Assured Guaranty which cost the company $1.1 billion to settle loss-sharing reinsurance arrangement on 21 first
lien RMBS transactions totallying $4.8 billion net par. In other words the settlements that are about to be announce with MBIA and other monolines could possibly be in the double digits.

From the AGO release

 Assured Guaranty Ltd. (NYSE:AGO - News) (“AGL” and, together with its subsidiaries, “Assured Guaranty” or the “Company”) announced today that it has reached a comprehensive settlement with Bank of America Corporation and its subsidiaries (collectively, “Bank of America”), including Countrywide Financial Corporation and its subsidiaries (collectively, “Countrywide”), regarding their liabilities with respect to 29 residential mortgage-backed securities (“RMBS”) transactions insured by Assured Guaranty, including claims relating to reimbursement for breaches of representations and warranties (“R&W”) and historical loan servicing issues.

The settlement agreement includes a payment of $1.1 billion to Assured Guaranty as well as a loss-sharing reinsurance arrangement on 21 first lien RMBS transactions. The settlement covers all Bank of America or Countrywide-sponsored securitizations, as well as certain other securitizations containing concentrations of Countrywide-originated loans, that Assured Guaranty has insured on a primary basis. The settled transactions have a gross par outstanding of $5.2 billion ($4.8 billion net par outstanding) as of December 31, 2010, or 29% of Assured Guaranty’s total below investment grade RMBS net par outstanding, and consists of 8 second lien securitizations and 21 first lien securitizations.

“We are pleased to have reached a settlement with Bank of America that puts this legacy issue behind both of us,” said Dominic Frederico, President and Chief Executive Officer. “This settlement significantly strengthens our balance sheet, allowing us to more effectively assist municipal issuers. We hope that this settlement—negotiated outside of litigation—encourages other R&W providers including JPMorgan Chase, Deutsche Bank and Flagstar Bank to accelerate the R&W claims settlement process.”

The cash settlement of $1.1 billion will be paid in full by March 31, 2012. The initial payment of $850 million was paid on April 14, 2011. In addition, Bank of America and Countrywide have agreed to a reinsurance arrangement that will reimburse Assured Guaranty for 80% of all paid losses on the 21 first lien RMBS transactions until aggregate collateral losses in those transactions exceed $6.6 billion. Cumulative collateral losses on these transactions were approximately $1.3 billion with no paid losses by Assured Guaranty as of December 31, 2010. As of December 31, 2010, Assured Guaranty’s gross economic loss on these RMBS transactions, which assumes cumulative projected collateral losses of $4.6 billion, was $490 million. The total estimated value of the settlement is expected to be accretive to shareholders’ equity and adjusted book value, a non-GAAP financial measure.