Breaking: BofA Settles with Fannie Mae

Small investor speed-dials his broker: "Dump my BAC!"

Within the past hour has come the announcement that Bank of America has reached a settlement of $11.6 billion with Fannie Mae for a bouquet of abusive practices in the home-mortgage industry.  More than half of that sum will go toward buying back residential mortgages sold to the government-sponsored enterprise (GSE) between 2000 and 2008.  BofA will refund the original purchase prices (which exceed current fair value) plus accrued interest.  There will be additional cash payments to Fannie totaling nearly $5 billion in compensatory fees.  The bank expects a hit of $2.7 billion to pre-tax earnings for Q4.

This would actually be good news for the company if this were the end of it.  But there is more exposure for Bank of America, one of 14 lenders now negotiating with the Office of the Comptroller of the Currency for a settlement of claims arising from foreclosure abuses and botched loan modifications (an announcement on the so-called "robo-signing" scandal is expected any day, with an expected price tag of $10 billion split among all parties).  Even with Fannie out of the way, BofA must confront a long line of ticked-off mortgage insurers.  As of September 30, 2012, the company had $16.3 billion reserved for future pay-outs.  ZeroHedge suggests that that will not be enough, as outstanding claims are in the tens of billions of dollars:

"[W]hile the additional [representations and warranties] provision may be $2.5 billion for just one Fannie, look for the final number to be far greater when all other exposures are settled, which include private labels, Freddie, second-lien monolines as well as whole loans."

[update, 11 a.m.--]

Just in.  Federal regulators have settled with ten banks for $8.5 billion over the above-mentioned foreclosure abuses.  The jury is still out on four other banks.  Bank of America is one of the ten to settle.  (Federal Reserve announcement here.)  Yves Smith at NakedCapitalism.com calls the settlement another "ritualized sellout."

Go here for a report on Bank of America's shrinking business model.