Dow-30 component Bank of America (BAC – Free Bank of America Stock Report), the giant bank and financial services company, has announced an agreement to resolve a significant portion of the mortgage repurchase and servicing claims it inherited from Countrywide Mortgage, a company it acquired in 2008.
Bank of America and Countrywide agreed to pay $8.5 billion in cash to settle nearly all of their legacy Countrywide-issued first-lien private-label residential mortgage-backed securities exposure. The payment is scheduled to be made, after court approval, to Bank of New York Mellon (BK), the trustee representing 530 trusts with an original principal balance of $424 billion and an unpaid principal balance of about $221 billion. Although some big investors might have preferred that BofA continue fighting the claims, the settlement is supported by 22 large financial entities, including BlackRock (BLK) and the Federal Reserve Bank of New York.
Bank of America also plans to record an additional $5.5 billion provision in the June quarter for its remaining representations and warranties liabilities (demands that it repurchase mortgage securities) for both government-sponsored enterprise (GSE) and non-GSE exposure. Also, June-quarter results will likely include $6.4 billion in other mortgage-related charges, including the writeoff of goodwill in the Consumer Real Estate Services division and litigation costs.
Including the settlement, the reps and warranties provision, and additional mortgage costs, BofA expects to report a June-quarter loss of $0.88-$0.93 a share. Absent these items, management indicated the company might have earned $0.28-$0.33 a share in the period, exceeding our previous estimate of $0.21. The better-than-expected operating performance reflects higher sales and trading results and lower credit costs. Although we have raised our share-net estimates for the final two quarters of 2011, to $0.28 and $0.30, respectively, we expect the company to report a loss of about $0.15 a share for 2011, including the big June-quarter loss. For 2012, we look for BofA to earn $1.50-$1.70 a share.
Following the settlement, BofA estimates its range of possible losses related to its non-GSE investor reps and warranties expense at up to $5 billion over expected accruals. The settlement puts a big chunk of BofA's mortgage problems behind it, but there's still some uncertainty regarding its ultimate mortgage repurchase costs.
About The Company: Bank of America was formed by the merger of NationsBank with BankAmerica in September of 1998. As a financial holding company, it provides banking and financial services to individuals, corporations, and governments worldwide. Acquisitions over the years include FleetBoston Financial, MBNA, LaSalle Bank, Countrywide, and most recently, Merrill Lynch. In total, the bank has about 6,000 offices in 29 states and Washington D.C.
At the time of this article's writing, the author did not have positions in any of the companies mentioned.