BofA Settles with Fannie & Freddie, but Troubles Remain

Bank of America continues to dominate the headlines, this time due to a $2.8 billion settlement with Fannie Mae and Freddie Mac.  According to Reuters, the mortgage finance companies had claimed that BofA sold them bad home loans.  Well, duh!

The article goes on to quote Alan Villalon, senior bank analyst at Nuveen Investments (Chicago):

“This takes away a nice headline risk” for Bank of America.

But what about the mortgages sold to private investors?  The risk is still there.  And many mortgage investors have complained that they were sold mortgages that didn’t meet their underwriting criteria.  So don’t be surprised when you see lawsuits filed against banks nationwide that packaged and re-sold mortgages.

But the big news from this story is the precedent that has been set.  The Federal Housing Finance Agency (which regulates Fannie and Freddie), indicated that other banks may be forced into similar arrangements.  Oh boy…I smell trouble.   And I wonder how the big banks will pay for these lawsuits…bailouts?

Private investors are already making their complaints known.  Bank of America’s 3rd quarter earnings presentation included $8.7 billion in repurchase requests from outside investors and insurers.

And BofA seems to be warming up to the idea of negotiating with investors.  According to Reuters, in October BofA’s Chief Executive Brian Moynihan said:

the bank would fight back against investors whose attitude was: “I bought a Chevy Vega but I want it to be a Mercedes.”

That response must not have been received well, because in December BofA began negotiations with several mortgage investor groups.

Just don’t expect anybody to restore your 401k to its pre-real-estate-bubble-burst status.

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