BofA Settles With Fannie Mae Over Reps And Warranties For $10 Billion, To Incur $2.7 Billion Pretax Hit

Tyler Durden's picture

As had been widely expected, days before a National Mortgage/Foreclosure settlement is formally announced, the most exposed banks have started tying up the loose ends with the other nationalized entities. Sure enough, moments ago Bank of America just announced a $10 billion settlement with one of the GSEs - Fannie, whose CEO Tim Mayopoulous was BofA's former General Counsel and one of the people scapegoated by Ken Lewis. As just reported, as part of the agreement to settle representations and warranties claims, Bank of America will make a cash payment to Fannie Mae of $3.6 billion and also repurchase for $6.75 billion certain residential mortgage loans sold to Fannie Mae, which Bank of America has valued at less than the purchase price. These actions are expected to be covered by existing reserves and an additional $2.5 billion (pretax) in representations and warranties provision recorded in the fourth quarter of 2012. Bank of America also agreed to make a cash payment to Fannie Mae to settle substantially all of Fannie Mae’s outstanding and future claims for compensatory fees arising out of past foreclosure delays. This payment is expected to be covered by existing reserves and an additional provision of $260 million (pretax) recorded in the fourth quarter of 2012. Bottom line: hit to Q4 pretax earnings will be $2.7 billion. Yet, as BAC notes, despite the settlement, "Bank of America expects earnings per share to be modestly positive for the fourth quarter of 2012." Which means prepare for one whopper of a loan-loss reserve release for the quarter as more "earnings" are nothing but bookkeeping gimmicks.

As for the implications of this settlement, we learn two things:

i) as we have said since 2010, BAC has been very much underreserved on its total putback exposure and the additional $2.5 billion in provisions to settle with Fannie means that ongoing provisions over the last 5 quarters have been far too low as seen in this chart from the firm's latest earnings presentation:

ii) the $10 billion settlement with one GSE is put in the context of total reserves as of Q3, 2012, at $16.3 billion.

So with one of the GSEs out of the way, and with an additional $2.5 billion in reserves having to be established just to prefund this particular $10 billion settlement, one can see why the firm is so skittish in coming to a settlement over its private label exposure, which according to some is where the true fulcrum loss lies, and as per Piper Jaffray is estimated at tens of billions in total. Of this, MBI is the leading case study, which seeks $4-5 billion. So while the Fannie settlement was perfectly expected, as the government would hardly impair one of its darling banks by too much (and one wonders whether Mayopoulos did recuse himself of any negotiations), when it comes to private labels, there will be blood.

And while the additional provision may be $2.5 billion for just one Fannie, like for the final number to be far greater when all other exposures are settled, which include private labers, second-lien monolines as well as whole loans.

As a result, don't expect the bank to be paying much if any dividends in 2013 either, as the bulk of the free cash flow will once again be rerouted for loss provisions which will come, just a question of when.

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HedgeAccordingly's picture

considering the sector has been ripping lately this news is not THAT out of left field.... 

with XLF approaching multi year highs over 17.20 .. could be another vicious squeeze 

jPM & XLF chart - 

Looney's picture

Isn’t Bank of America as a “Government-sponsored enterprise” as Fannie or Freddy are?


I think all Too-big-to-fail’s, actually the whole Market, should be renamed into what it is - a Government-sponsored enterprise!  ;-)



ihedgemyhedges's picture

All I know is gold just took it's routine morning dump.............

kliguy38's picture

"natural" market forces at work....that is if you view the masters of the universe as "natural"

goldfish1's picture

Pamplona's locksmiths join revolt as banks throw families from their homes

Locksmith Iker de Carlos: 'It took us only 15 minutes to reach a decision. We all had stories of jobs we had been on where families had been left on the street.'


Reclaim your power.

legal eagle's picture

So, just so we are clear, Bank of America is admitting that they fudged the mortgages, and fudged the MBS associated with the loans, but there is no relief for the borrowers who are losing their homes because these actions hyperinflated the market, clouded title to millions of homes, and circumvented all of the state recordation laws?  Is the harmed party here really the government owned Fannie Mae? 

flattrader's picture

According to Santelli, the wronged homeowners are "losers."

philipat's picture

So, in summary, the shareholders get shafted again. When will they hold the bastards who did this responsible? Wait, I know the answer to that........

Rainman's picture

The answer is up yours !.....sincerely, Senator Barney Frank

unununium's picture

The shareholders collectively believe that BAC is worth only half of what its own books say it is worth, AFTER mark-to-make-believe FASB rules.

Put differently, BAC has not fooled anyone that it actually has its depositors' money.

For a bank, to be valued this way (and not at ZERO) is not so much a sham and mockery but a testament to the utter foolishness of investors.


chubbar's picture

Speaking of BoA assholes, here's a little tidbit of how they run their operations.

"(Ironic Surrealism) On December 29, the owner of American Spirit Arms; Joe Sirochman relayed this chilling news via Facebook:

My name is Joe Sirochman owner of American Spirit Arms and I wanted to share my recent experience with Bank of America . Which we have been doing business with for over 10 years .

Everyone is familiar with the latest increase in guns sales , dealers selling out of inventory , manufacturers back logged for months, large revenue all generated in the last two weeks.

American Spirit Arms is no exception to the overwhelming demand . What we have experienced is that our web site orders have jumped 500 % causing our web site E commerce processing larger Deposits to Bank Of America. Well, this through up a huge red Flag with Bank of America .

So they decided to hold the deposits for further review, meaning that the orders and payments that were coming in through the web , being paid by the customer and that were shipped out by American Spirit Arms, the bank was keeping . As you could imagine this made me furious.

After countless hours on the phone with Bank Of America I finally got a manager in the right department that told me the reason that the deposits were on hold for Further Review. Her exact words were “WE BELIEVE YOU SHOULD NOT BE SELLING GUNS AND PARTS ON THE INTERNET”

I flipped the F**k Out and told them that they have no right to make up their own new rules and regulations, that we are a firearms Manufacturer with all the proper licensing FFL (Federal Firearm license ), SOT and that we follow all Federal and All States’ rules and regulations on shipping Firearms and parts and that we are also Audited by ATF and Homeland Security on a regular basis.

She said that she understands that but that the deposits will be released After they have a chance to review and clear them …I told her that This was unacceptable and the those deposits (that were a week old by now ) needed to be released ASAP, that we are a small business and rely on the revenue to run and stay operational.

After that being said another Manager got involved and released one of the deposits (to help out )… So far to date after Two weeks of sales only 1/3 of collected internet sales have been released. I am still pissed and looking for another Bank and options. I just thought the public should know. I will keep everyone posted on new developments. Joseph P Sirochman American Spirit Arms"

flattrader's picture

I can't wait until BoA collapses.

smiler03's picture

A bit OT but this reminds me of PayPal....


"We have decided that you (with a feedback of 158 & 100%) must send your $600 camera to this buyer (with a feedback of 0 & 0%) before they pay for it".


Snakeeyes's picture

Of course, this settlement assumes that Fannie Mae is "Simple Jack" and too stupid to spot check loan files.

HD's picture

Meanwhile - Warren searches around blindly in his soapy bathtub water for his rubber duckie...

GetZeeGold's picture



I'm predicting the American public ain't gonna see a damn dime of that money.

fonzannoon's picture

85 billion a month handed to the banks. the rest is noise.

HD's picture

Yea but they gotta share it - what a jip...

Panafrican Funktron Robot's picture

Hell, that's just if there's no further economic deterioration.  It could easily jump to 100 billion or more.  Per month.  And to think, we used to view 700 billion as a "bazooka".  Shit, that's about a full clip of a .357 magnum at this point.  Soon to be downgraded to a .22 rabbit hunter.  

Catullus's picture

Thus the QE(infinity) where the Fed purchased $45bn in MBS flow. It'd be nice if someone tracked the CUISP numbers to see if they're marked the same as when BAC buys them back from Frannie and when they're ultimately off-loaded to the Fed in the POMOs.

fonzannoon's picture

they just sent gold below 1650 in about a 1 minute span. 8 bucks shaved off. it's going go be a long year.

smiler03's picture

+1 for Silver.  Same knockdown but a positive day overall.


(possibly post US close recovery)

BurningFuld's picture

The fed is buying 40 billion a month of MBS. Wonder who they are making whole? China perhaps? You know the country that had it's citizens slave away for a decade to acquire a trillion USD only to have Ben print that amount out of thin air in a year. Wonder if they are secretly livid??

fuu's picture

$40 Billion/month is so 2011, wake up to the $85,000,000,000/month reality of today.

HardAssets's picture

The Chinese could barely feed their population before the banksters and corporations started moving US industry offshore at the detriment of the American people. Because of that investment, China is now one of the world's global economic powers.

What do they have to be livid about ?

smiler03's picture

Shenanigans. Tut Tut.


China was last in famine in 1961/1962. The population went into huge expansion immediately after that. Long before US offshoring.

Never One Roach's picture

Bullish! Should boost BOA stock a few points higher on the bad news.

ShrNfr's picture

When do they sue Barney Frank? Crap, without that asshole and the others like Waxie Maxie, Franklin Raines, etc. There never would have been this mess at FNM and FRE.

Panafrican Funktron Robot's picture

Yeah, somebody totally forced BAC to buy Countrywide for their specific detriment!

MillionDollarBoner_'s picture

So Timmay gives Treasuries to Bendy. Bendy gives freshly "printed" electronic IOU's to Timmay. Timmay spends them on rigging the housing market to buy votes - Fannie is the conduit. Fannie deals with BAC and fortunes are made.

Then Fannie & BAC fall out. So Timmay gives Treasuries to Bendy. Bendy gives freshly "printed" electronic IOU's to Timmay. Timmay spends them on bailing out the banks - BAC being a major recipient of taxpayer-backed largesse. BAC deals with Fannie and further fortunes are made. No-one goes to jail.

What's not to like ?!?:O)


buzzsaw99's picture

Didn't JPM recently upgrade BAC & C?

FreeNewEnergy's picture

I guess this mans BAC has my mortgage again. Fuck-A, time to file another motion or two.

Sooner or later, they're going to just lose all my paperwork. July 2013 will be four years with no mortgage payments.

I love this country.

smiler03's picture

You paid too much for your house and are enjoying the taxpayer bailout. Normally ZH readers would downvote you like hell, you know, those ones that kept up their payments and accepted their responsibilities. Things must be changing :O)


Maybe you should change your ID to FreeHousingFromTheTaxpayer ?

Benjamin Glutton's picture

This interdepartmental transfer only matters if I pretend both of these 'companies' are not essentially nationalized GSE's.

A Lunatic's picture

I recently received a check from a class action lawsuit regarding some bullshit bankster shenanigans; it was for a whopping $1.67. Gee, I feel much better now.........

HardAssets's picture

Your check was originally for $1 Million, but was eaten up by 'attorney fees' (same guys in Congress)

Harbanger's picture

But you may have felt bad if they weren't sued.  Class action lawsuits are mostly "feelings" based money racket for lawyers, of little or no benefit to the beneficiaries.

H E D G E H O G's picture

The phrase "existing reserves"  is really a code word for fucking TAXPAYER MONEY, illegally obtained through fraud and cronyism, and held by the Federal Reserve/Treasury, accruing TAXPAYER MONEY interest. There, fixed it.

GubbermintWorker's picture

BofA is ALL POWERFUL and can now decide who can sell guns over the internet. They know best folks!

Whiner's picture

How much did GSE-BAC net off bogus mortgage antics with GSE-Fannie over the run up to 2008? I can assure you it is a ten fold multiple of their settlement. The music goes round and round. Only a few chairs left. Better hang your butt over one with the AU stamped on it.

Panafrican Funktron Robot's picture

What really sucks is that, for the $10 billion + the $4 billion they paid for Countrywide, they in exchange definitively own a gigantic fuckload of homes and commercial properties, and they get to extract interest on those properties.  Paper losses ain't shit, all they care about is what real assets (backed by threat of government muscle) they own in exchange for that paper.  

Note, when they tell you that you're a homeowner, they're lying.  If you have a mortgage, you don't own shit.  Even if you don't, better pay that property tax, or it becomes not yours in short order.  Those taxes, of course, are extracted in order to pay bonds (with interest) owned by... the banks and other hyperrich fucks!

OccupyTVstations's picture

Former BofA employee now CEO of Fannie 'settles' with former/future firm?!  Good thing Cheney made 'Conflict of Interest' a forbidden term in the new America.

Curious about what insiders knew this deal was coming down the pike?  Turns out that on Nov 30th, one Nationstar Mortgage officer (company that just bought $215 billion worth of mortgages for $1 billion) bought 47k shares for $0/share! Is this legal? haha- as if that matters.

Nov 30, 2012    LAKSHMINARAYANAN RAMESH Officer    46,751    Direct    Acquisition (Non Open Market) at $0 per share.