Bank of America has agreed to pay $2.8 billion to taxpayer-funded Fannie Mae and Freddie Mac to settle claims that it sold the mortgage giants bad home loans. The agreement is the largest so far between Fannie and Freddie and lenders that sold them loans during the subprime lending boom and before standards were tightened. Fannie and Freddie buy about two-thirds of all home loans, then package and sell them to investors with a promise to cover losses and seek restitution for loans that they say failed to meet their underwriting standards. This is not an uncommon practice for all major banks.
The financial industry may face about $52 billion in costs from such mortgage claims, according to a consensus of Wall Street analysts’ estimates. The agreement deals with loans originated by Countrywide Financial, one of the largest subprime lenders. Bank of America acquired it in 2008. The cost to Bank of America, the nation’s largest bank and mortgage servicer, was in line with most Wall Street estimates, which reduced fears among investors that costs could go much higher for the whole industry.
Fannie and Freddie, which were taken over by the government more than two years ago, may get more restitution than private investors. It’s said that lenders need the two mortgage giants to continue to buy their loans. The Federal Housing Finance Agency regulates Fannie and Freddie. Approximately $3.3 billion in recent settlements have been returned to taxpayers. The Bank of America agreement resolves the bulk of Bank of America’s exposure to Fannie and Freddie. But it still faces potential liabilities from mortgages it sold to private investors. As part of the settlement, Bank of America made a $1.28 billion cash payment to Freddie Mac and $1.52 billion to Fannie Mae.
Source: USA Today
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