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B of A’s Big Bill for Bad Loans Finally Comes Due

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B of A Clock imageBank of America will pay the government $2.6 billion to resolve hundreds of thousands of illegal or fraudulent mortgage loans. And the nation’s largest bank could still be on the hook for billions of dollars more if additional homeowners fail to repay loans that were made illegally.

Still, the agreement is much smaller than many analysts had predicted.

“So what is evident that no one knows what they are talking about” when it comes to estimating the cost of the ongoing mortgage crisis, says Dick Bove, bank analyst with Rochdale Securities LLC. “Including myself.”

The settlement deals with loans made by Countrywide Financial, which Bank of America bought in 2009. The loans were then sold to Fannie Mae and Freddie Mac, the two private mortgage giants that were taken over by the government in 2008 after both companies went bankrupt due to the subprime mortgage crisis.

Analysts including Bove believed that Bank of America could owe Fannie and Freddie as much as $20 billion on the bad loans. Instead, the bank paid Freddie Mac $1.28 billion in cash on Dec. 31, according to a bank press release. It also will pay Fannie Mae $1.52 billion.

The announcement appears to be good news for Bank of America.  Fannie and Freddie originally asked the bank to buy back $6.8 billion worth of bad loans.  That’s slightly more than half of the $12.9 billion the bank said it could potentially owe investors on mortgages gone sour, according to a presentation to bank investors given Oct. 19.

After the deal was announced, Bank of America’s stock rose 85 cents, or 6.5%. Even though $2.6 billion sounds like a lot of money to most people, it represents just a tiny fraction of the bank’s $2.3 trillion in assets.

“Our goals remain the same: put these issues behind us; focus on serving customers and clients; and continue to help distressed homeowners facing difficult times,” Brian Moynihan, Bank of America’s CEO, said in a press release.

The agreement may be less good news for taxpayers, who own Fannie and Freddie since the government took control of both private companies in 2008 during the subprime mortgage crisis.

“It’s much less than I had assumed,” Bove says.

Fannie Mae didn’t comment on the agreement, which leaves the company the option to bring new claims in the future if more fraudulent loans go bad. Freddie Mac’s CEO, Charles E. Haldeman, defended the agreement, which effectively closes any chance Freddie has of bringing future claims.

“I’m pleased to reach this agreement with Bank of America and believe it is in all parties’ best interests,” he said in a press release.

Image: Taber Andrew Bain, via Flickr.com

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