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Investments

Fannie Mae settlement relieves BofA headache

Bank of America (BAC) announced a multibillion dollar mortgage settlement deal with Fannie Mae to resolve legacy mortgage repurchase claims through a $3.6 billion cash payment to the government-sponsored enterprise. 

The deal is expected to provide a solid path for those invested in the bank's stock. Investors in Fannie Mae's mortgage bonds, on the other hand, may face higher prepayment risk.

Solid stock performance following the announcement came as no surprise to vice president, managing director Christopher Whalen of Carrington Investment Services who told HousingWire that this decision removed one of Chief Executive Officer of BofA Brian Moynihan's "biggest headaches."

No doubt leading to a boost in investor confidence, Whalen said. And as early Yahoo! Finance stock performance shows (graph below):

"Now he can focus on the private investors and the other few remaining issues that they still have to deal with, with Countrywide," Whalen said.

He added, "Getting this behind him was some kind of finality with Fannie Mae."

The agreement is a big step in allowing the mega bank to distance itself from legacy mortgage issues that grew all the more extreme after its acquisition of Countrywide.

Fitch Ratings reported that the settlement deal is also a positive move for Bank of America due to the company's capital and earnings generation, which will "allow management to begin to move from dealing with legacy issues to focusing more on growing the franchise."

Disputes on the quality and performance of the mortgages have grown tense between the two financial giants. In February of last year, business in this regard came to a stand still between the two.

BofA was faced with numerous representation and warranty challenges on the mortgage front, and as a result of growing uncertainty, it decided to no longer sell certain mortgage refinances into GSE mortgage-backed securities.

"The issue is tied to ongoing disagreements between Bank of America and Fannie Mae in regards to repurchases," said Dan Frahm, spokesman for BofA.

Given the existing reps and warrant reserves, the proposed settlement is expected to increase provision expense by $2.5 billion in the fourth quarter of 2012, which BofA will cover well due to the company's earning generation, Fitch stated.

By coming to a settlement deal with the bank, this a positive push for Fannie Mae to put this behind them, Whalen stated.

"It’s not going to fill the hole at Fannie by any means, but it starts to help us close the door on that chapter, so we don’t have to have this noise effecting the stock price going forward," he added.

However, BofA mortgage servicing rights sales creates new concerns for investors in higher Fannie coupons, Barclays said.

"Given the substantial BOA concentration in pre-HARP cohorts, this should keep higher coupon speeds elevated and perhaps increase in 2013," said Barclays analysts.

For pre-Home Affordable Refinance Program vintages, BofA concentration is extremely high, 25% for Fannie Mae. Also, the company's pre-HARP speeds have been slow when compared to other banks.

"A change in the servicer, by all indications, will lead to a significant pickup in BOA speeds and, hence, for higher coupons," Barclays said. 

Bank of America has about $150 billion in pre-HARP Fannie Mae servicing, according to its servicing book. Thus, the MSR sale could result in the transfer of the bulk of its FNMA pre-HARP servicing book, Barclays noted.

cmlynski@housingwire.com

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