Report: BofA, Fannie in Talks Over Bad Mortgages

Bank of America Corp (NYSE:BAC) is in talks with Fannie Mae to resolve a dispute over bad mortgages that the government-controlled entity wants the No. 2 U.S. bank to buy back, sources familiar with the matter said on Thursday.

The two sides have been in discussions for some time, but the talks have become more constructive recently, the sources said, although they cautioned that a resolution is not imminent.

At issue are billions of dollars of mortgages that Bank of America and its Countrywide Financial subsidiary sold to Fannie Mae from 2004 to 2008, during the U.S. housing boom. As the loans go bad, Fannie wants Bank of America to buy them back.

Bank of America has balked at buying back some of the loans. In recent quarters, it has said that Fannie Mae is increasingly asking it to purchase loans in which borrowers made payments for more than two years or that went bad more than a year-and-a-half earlier.

The bank contends the loans soured due to economic conditions and other reasons rather than poor underwriting or lack of proper documentation, which are common causes for repurchase requests.

In a quarterly securities filing on Thursday, Bank of America said it is in dialogue with Fannie Mae to "address our ongoing differences." Of its $10.1 billion in unresolved claims with Fannie, it said $7.3 billion related to loans in which the borrowers have been paying for more than two years.

"We continue to believe that our interpretation of the governing contracts is consistent with past practices between the parties and our contractual obligations," the filing said.

The dispute has become so tense that at the end of January, Fannie did not renew a contract with Bank of America to buy some of its home loans. The bank still sells mortgages to Freddie Mac and keeps loans in its own portfolio.

Bank of America and Fannie Mae declined to comment. In its most recent quarterly filing, in May, Fannie Mae said it continued to work with Bank of America to resolve the issue but had not changed its estimates of the amounts it ultimately expected to collect from the bank.

During the bank's earnings conference call last month, Chief Financial Officer Bruce Thompson said the spat would either end in a settlement or legal action.


In Thursday's quarterly filing, Bank of America also said it has received inquiries from regulatory authorities about identity theft protection services it offered its customers through third-party vendors. Customers may have paid for but not received the services, the filing said.

Authorities are also looking at whether the bank had proper oversight of the vendors, the filing said. The company is cooperating with the investigation.

Capital One Financial (NYSE:COF) last month agreed to pay $210 million to resolve charges by U.S. banking regulators, including the Consumer Financial Protection Bureau, that its call-center representatives misled consumers into paying for extra credit card products, including identity theft services.

Bank of America also disclosed its portion of a $7.25 billion settlement that credit card companies and banks reached last month with retailers over the alleged fixing of credit card and debit card fees. Of the bank's $738 million total, $539 million will come from an escrow fund set up by card company Visa Inc (NYSE:V). The rest will be a cash payment for MasterCard-related (NYSE:MA) claims.

The bank also said in the filing that it has received subpoenas and requests for information from the U.S. Justice Department, the U.S. Commodity Futures Trading Commission and the United Kingdom Financial Services Authority regarding their investigation of the setting of the Libor interest rate benchmark. The bank had previously said it, like other banks, had received inquiries from U.S. and foreign regulators. The bank said it is cooperating.


Other banks have said that Fannie Mae and Freddie Mac have been asking them to buy back more loans, but the problem is most acute for Bank of America. That is because in 2008 it bought subprime lender Countrywide, which produced some of the most toxic loans during the housing bubble.

Bank of America last month said total repurchase requests outstanding increased more than 40 percent to $22.7 billion in the second quarter from the first quarter, spurring investor concern that the bank will be on the hook for more mortgage-related losses.

Claims from Fannie Mae and Freddie Mac represented a little less than half of the total. Claims from private investors that bought loans from the bank also jumped.

Bank of America has about $16 billion in reserves set aside for these claims, which include money to cover an $8.5 billion settlement reached in 2011 with private investors that bought securities backed by Countrywide loans. That agreement still needs court approval.

The bank's executives have cautioned that the $22.7 billion in claims does not represent potential losses for the bank but simply the unpaid balances of the loans in question. Those loans are backed by collateral, and in settlement agreements the bank has typically paid pennies on the dollar of actual losses.

The bank, however, has said more claims could still come in from the government-controlled entities and private investors.

In a report this week, Bernstein analyst John McDonald estimated that Bank of America has worked through about two-thirds of its potential repurchase requests and that it may eventually pay another $5 billion above its existing reserves.

Fannie Mae and Freddie Mac said they are looking out for U.S. taxpayers in making repurchase requests. That's because the two entities were placed into government conservatorship in 2008 as their losses ballooned. Fannie has said in a securities filing that it may need more funds from the U.S. Treasury if it collects less than expected from Bank of America.

Bank of America has far more Fannie Mae mortgage repurchase requests than any other bank. As of March 31, it accounted for 58 percent of the entity's total, according to Fannie's most recent quarterly securities filing. The bank with the second most requests, JPMorgan Chase & Co (NYSE:JPM), accounted for 10 percent of the total.