Bank of America Corp. is feeling billions of dollars in fresh pain from its 2008 acquisition of home-loan specialist Countrywide Financial.
Implicitly acknowledging that it overpaid significantly when it bought the Calabasas lender for $4.2 billion in stock, Bank of America said Monday that it was slicing $2 billion off the value of that investment on its books.
The Charlotte, N.C., bank also disclosed that it agreed to pay Fannie Mae and Freddie Mac a total of $2.8 billion to settle claims of misrepresentations on billions of dollars in loans that went sour after Fannie and Freddie bought them from Countrywide, which was once the No. 1 home lender.
In exchange for the payments, the government-controlled mortgage buyers agreed to drop their demands that Bank of America buy back the mortgages. The $2.8 billion is in addition to $3.5 billion that BofA already paid Fannie and Freddie to resolve similar claims.
Fannie Mae, based in Washington, and Freddie Mac, based in McLean, Va., have been struggling to recoup some of the enormous losses that pushed the federal government to take over the companies.
"These actions resolve substantial legacy issues in the best interest of our shareholders," Bank of America Chief Executive Brian Moynihan said in a statement issued by the company, which holds more customer deposits that any other U.S. bank.
Wall Street applauded the settlements, which analyst Christopher Whalen of Institutional Risk Analytics called "a gift" to Bank of America because they appeared favorable to the company. The bank's shares jumped 85 cents, or 6.4%, to $14.19.
"We believe this addresses one of the uncertainties surrounding the shares of [Bank of America] at a cost that appears to be less than the market anticipated," Barclay's Capital analyst Jason M. Goldberg wrote in a report to investors.
Bank of America's moves will slash billions from its earnings in the just-ended fourth-quarter. The latest settlements with Fannie and Freddie will reduce the bank's pretax earnings by $3 billion, which includes about $200 million to resolve future loan buy-back demands. The $2-billion write-down of the mortgage unit's accounting value will directly hit the bank's bottom line because it is not tax deductible.
The bank said the reduction in the accounting value of its Home Loans and Insurance division was triggered by increased uncertainty about litigation; higher mortgage customer service costs, including loan modifications; foreclosure-related issues; and the cost of changing staff members' duties from making loans to modifying them.
Bank of America still faces demands that it repurchase more than $6 billion in subprime and other risky loans that were made by Countrywide and packaged into so-called private-label mortgage securities.
Investors in those bonds — and insurers that guaranteed them — say they were misled about the mortgages backing the securities. Bank of America spokesman Jerry Dubrowski said the bank would consider repurchase demands of such loans on a case-by-case basis.
The bank also is among major lenders that are negotiating with a coalition of state attorneys general to settle allegations of widespread wrongdoing in dealing with distressed borrowers and in foreclosure proceedings.
Arizona and Nevada have sued Bank of America separately over its handling of loan modifications.
The $3-billion provision tied to the accords with Fannie and Freddie cover demands already made for repurchases of Countrywide loans and future demands that can currently be foreseen, the bank said. It does not include potential demands by Fannie and Freddie for buy-backs of loans that Bank of America originated.
Edward J. DeMarco, the acting director of the Federal Housing Finance Agency, which regulates Fannie and Freddie, said the agency had reviewed and approved the settlement with Bank of America and a similar recent agreement with Ally Financial Inc., the lender formerly known as GMAC.
All told, DeMarco said, the settlements with Bank of America and Ally Financial will recover $3.3 billion for taxpayers, who were stuck with the bill for supporting Fannie and Freddie.