A Quick Take on the Deal
Early in January, Bank of America announced a deal with Freddie and Fannie whereby it was settling its potential put-back obligations to these entities for a total of $2.8 billion. This deal covers just mortgages related to Countrywide (which Bank of America bought), but will avoid more litigation regarding BAC's ultimate responsibility in buying back misrepresented or outright fraudulent mortgages under the terms of the put-back agreements that it had with these agencies.
In many respects, this was a deal so favorable to BAC it was close to outright theft. The liability between BAC and Freddie/Fannie could have been anywhere from $10 billion to upwards of $20 billion depending upon the assumptions an investor wanted to make about the settlement. As it stands, even more than $20 billion would have represented only about a 1% delinquency rate for these loans, when the actual rate has been running more like 11%.
It is also worth mentioning that this is tantamount to another bailout for the banks. Freddie/Fannie are under direct government control, while Bank of America (along with Citigroup (NYSE:C), Wells Fargo (NYSE:WFC) and many others) needed very cheap government money to stay liquid. What is interesting about this move, though, is that it avoids the splashy headlines of another TARP-like program that would be announced from a White House or Congressional podium. (For more, see Liquidity And Toxicity: Did TARP Fix The Financial System?)
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