The Banking and Strategy Initiative

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BofA gives up more to struggling Fannie Mae | Bank Earnings Season

in a second settlement that will hurt BofA immediately in the fourth quarter the bank agreed to pay Fannie mae nearly $7 bln for some 32000 mortgages faultily sold to the Government backstop (from Countrywide) for the outstanding principal of $300 mln on these $1.4 Tln mortgages when they were issued. Additionally the bank agreed to pay Fannie mae more than $1 bln for servicing rights of 2 mln other mortgages worth about $306 bln in outstanding principal

Banks have been warehousing newly issued mortgages with themselves than with Fannie Mae as they try to realise use for their own Capital and try to keep them in house to achieve the higher rating on the RMBS after a near bankruptcy of the two Government sponsors of Home Financing in the boom to 2007. A higher rating on the new securities enables banks to count them as Liquid assets towards immediate outflows in the new Liquidity Coverage regulations

Apart from this settlement where BofA is already paying $3.6 B in cash, it is paying $2.9 bln in the joint settlement with 14 banks to forget foreclosure abuses making immediate payments to all foreclosures occurring in 2009-10 with $1.8 B as assistance to distressed homeowners and the rest in cash. As of September 30, the bank still counted $30 B towards unresolved mortgages in disputes and of the $3.5 B expected in Operating Profits in the fourth quarter, the bank has likely given up $2.9 bln in these charges but is already provided for $10s of billions home in the next two years. The Q4 hit includes $2.1 bln in legal expenses and other settlements signed for expenses in this quarter. The bank has paid out $40 bln in mortgage related charges since 2008 and the new Fannie mae settlement takes out 44% of the outstanding disputed Mortgage principal of $30B above.

The stock has jumped to a new all time high of $12 and is holding above $12 on the settlement announced after market hours yesterday as it comes out with bare cash profits despite the ordeal.

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