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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.

 

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Fri, 04/15/2011 - 08:04 | 1171775 Duuude
Duuude's picture

2nd Witch:
By the pricking of my thumbs,
Something wicked this way comes. [Knocking]
Open locks,
Whoever knocks!
[Enter Macbeth]

Macbeth:
How now, you secret, black, and midnight hags!
What is't you do?

Macbeth Act 4, scene 1, 44–49

After conjuring up "double, double toil and trouble" [see p. 32], the three witches admit a visitor to their cave—King Macbeth of Scotland. "Something wicked this way comes," indeed, and they're delighted. Macbeth—at least, the wicked Macbeth—is in part their own creation. The first time around, they came looking for him, to deliver the enticing prophecy that set off the whole chain of events which has included Macbeth's regicide and subsequent bloody events. Now, Macbeth comes looking for them, and the witches summon apparitions to tell Macbeth exactly what he wants to hear: that he's invulnerable. This news is purposely ambiguous; it is calculated only to make Macbeth act more wickedly before he is finally finished off.

Fri, 04/15/2011 - 08:05 | 1171779 The Axe
The Axe's picture

Christ what great work TYler!!!!   upgrades probably coming on BAC...crazy world...No one calls it a pig...a dead pig...

Fri, 04/15/2011 - 08:25 | 1171810 Cursive
Cursive's picture

Crazy that BAC's price can levitate up the way it has, but it's going to zero.

Fri, 04/15/2011 - 08:36 | 1171842 Flounder
Flounder's picture

Hey, the analyst just up on Boomberg said BAC is a speculative buy.  So its got that going for it, which is nice.

 

Fri, 04/15/2011 - 08:23 | 1171809 Dick Darlington
Dick Darlington's picture

Hearing Morgan Stanley property fund missed a 3,3 billion debt payment and handed over the keys of an office building in Tokyo.

Fri, 04/15/2011 - 08:39 | 1171832 M.B. Drapier
M.B. Drapier's picture

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.

It must suit BoA just fine to have a man on the inside? And if the claimants end up sharing a limited pool of compensation, then BoA will claw some of it back as Merrill's share? Not A Lawyer.

Fri, 04/15/2011 - 08:34 | 1171839 Trader Joe
Trader Joe's picture

Holy smokes!

BAC just kinda dumped CFO Chuck Noski (who I worked under back in the day)

Chuck is as straight-laced as they come -- he's a no-bullshit guy that has never and will never fudge accounting or reporting, and he knows his shit up, down and sideways

Bottomline, this guys integrity is gold-plated

Which is why I was very confused as to why he would even think about working for a"banksta"

Well, obviously that little end run they did a few weeks back not telling him about the FED rejection of the divi, etc. pissed him off

So now they have him taking a position in Cali  (where he has always lived - he does the G-5 commute) to work in their mortgage area, something about his daughter graduating high school, personnel reasons, yada yada yada -- WTF!

This tells me one thing, BAC IS F**KED and that Noski has figured that out and wants OUT -- he has only been in the position for one year, and I guess that was enough

It also tells me that BAC may need to be bailed out again in some manner again in the future 

Fri, 04/15/2011 - 08:44 | 1171864 Seasmoke
Seasmoke's picture

the worthless HELOC they hold , will be the final nail in the coffin .....short them to zero

Fri, 04/15/2011 - 09:01 | 1171946 Cdad
Cdad's picture

Oooops...well, there you go.  Right before his shift ended....Joe Kernen sums up the whole Blight on America bank thing, "Bank of America called higher."

There you go.  Done.  Never mind about a completely bogus earnings report by the world's largest bank.  Just grasp the hopium pipe, sell your physical silver, and buy shares of BAC.  Done.  Easy.  There...no more stress about collapsing home values, banker crimes, puppet shows, Unicorn meat processing, asteroids...all gone.

Listen to the Kernen.....

Fri, 04/15/2011 - 09:02 | 1171950 JerseyGuy
JerseyGuy's picture

Wait...wha??? BAC will backstop and loss-share with AGO until cumulative losses hit $6.6 billion.  But AGO says the 21 1st Lien and 8 2nd lien deals have an outstanding par balance of only $5.2 billion.  Is that right, has BAC taken over 100% exposure?? Chris Whalen is fond of pointing out that the MIs are NOT insurers and are clearly insolvent given their respective exxposures.  But since the originators got downright pathologically deceitful in the origination process, and have R&W liability, perhaps this settlement is evidence that the MI escape hatch was supplied by Angelo and his crowd of dirty pirate loan officers.  Gotta hand it to you though, parsing the AGO settlement and applying the same terms to the much larger GSE potential claims puts BAC in need of bailout 2.0

 

Fri, 04/15/2011 - 09:56 | 1172152 Careless Whisper
Careless Whisper's picture

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.

now B of A is a "cutter".

  1. People who cut themselves sometimes also suffer from other mental health issues such as bipolar disorder, obsessive-compulsive disorder, depression, eating disorders or other challenges, though this is not always the case.
Fri, 04/15/2011 - 11:42 | 1172625 JerseyGuy
JerseyGuy's picture

From Housingwire.com:

The bank settled representation and warranty claims on troubled residential mortgage-backed securities with monoline insurer Assured Guaranty for $1.6 billion. The remaining principal balance on these severely delinquent loans totaled $10.9 billion.

The settlement covered 21 first-lien RMBS trusts and eight second-lien trusts.

Seems that the 29 deals covered under the settlement had $10.9 bn oustanding, which makes more sense if BAC is covering losses up to $6.6 bn.  But still, holy shit, 67% cumulative losses before BAC hits a release point?? And this is R&W liability.  Just how much of the pool violated the original R&Ws?  100%?  Jesus H. did anyone actually do their damn job originating loans between 2005-2007??  As a guy who was nipple deep in non-agency MBS from 2003-2010, I am friggin disgusted.  I kinda suspected that corners were cut, sometimes pretty deepy cut, but I never would have thought entire vintages were so horribly impaired by origination impropriaties and paperwork problems.  F'em all.  No one deserves saving.

Sat, 04/16/2011 - 19:53 | 1176722 Eyes on the World
Eyes on the World's picture

If anyone is still reading this post, I've written a piece over at my blog on this very topic whilst including a link back here.  I'm a newbie in the whole game and a new writer that's attempting to put down in words with humor what the hell is going on in a manner and language "regular folks" can understand.  I would appreciate any reads on it and my blog in general - not trying to promote, just looking for opinions.  Thanks, EOTW

http://lunchtime-leftovers.blogspot.com/2011/04/bof-fist-quarter-earning...

Do NOT follow this link or you will be banned from the site!