Bank of America said Monday it will pay $10 billion to federal mortgage issuer Fannie Mae to settle allegations that mortgages were improperly handled during the financial crisis.
The Charlotte, N.C-based bank will pay $3.6 billion in cash related to how it sold and distributed certain residential mortgage loans.
Bank of America (BAC) will also repurchase $6.75 billion worth of residential mortgage loans it and its Countrywide Financial unit sold to Fannie Mae, about 30,000 loans, from January 2000 through December 2008.
The repurchased loans had a total original principal of about $1.4 trillion. The outstanding principal balance is about $300 billion.
The bank also said it agreed to sell servicing rights on 2 million residential mortgage loans worth about $306 billion. Plus, the bank will pay $1.3 billion to Fannie Mae to compensate the federal mortgage issuer for loan servicing fees.
The bank's stock price was up about 0.5% to just over $12 a share in Monday trading. The stock price had jumped 2% in pre-market trading when the deal was first announced.
Bank of America bought Countrywide Financial in July 2008, just before the financial meltdown triggered by the bursting of a residential real estate bubble. Countrywide was a giant in mortgage lending, but was also known for approving risky loans.
Fannie Mae and Freddie Mac, which packaged loans into securities that were sold to investors, were in effect nationalized in 2008 when they nearly collapsed under the weight of their mortgage losses.
Federal lawmakers initially lauded Bank of America's purchase of Countrywide because the bank was viewed as eliminating a bad actor from the mortgage market. But the purchase has resulted in a host of regulatory fines, lawsuits and losses for the bank's mortgage business.
The acting director of the Federal Housing Finance Agency, which approved the settlement terms, said he was pleased.
This settlement "is in the best interest of taxpayers and reduces uncertainty in the nation's mortgage finance market," said Edward J. DeMarco, FHFA Acting Director.
Bradley Lerman, Fannie Mae's general counsel, also praised the terms of the settlement. "Fannie Mae has diligently pursued repurchases on loans that did not meet our standards at the time of origination," he said in a statement Monday.
Bank of America's CEO Brian Moynihan said in a statement that the settlement is "a significant step in resolving our remaining legacy mortgage issues, further streamlining and simplifying the company and reducing expenses over time."
The bank said the settlement will reduce the firm's pretax income by approximately $2.7 billion in the fourth quarter of 2012.
Written By: Kim Hjelmgaard, USA Today