Investopedia: Bank Of America Cleans Up Another Mess

As part of its first quarter earnings announcement, Bank of America (NYSE: BAC) announced that it reached its first significant agreement to resolve a non-GSE claim regarding shoddy mortgages. Though it is a positive development insofar as acknowledging responsibility and helping move things back toward normal, it may still be too little too late for the mortgage insurers.


The Deal with Assured Guaranty
Bank of America announced that it had reached an agreement with Assured Guaranty to resolve the insurer's claims against Bank of America for saddling it with billions of non-complying mortgages. The agreement covers a total of 29 first and second-lien residential mortgage trusts with an original exposure of nearly $36 billion and a current principal at risk of just under $11 billion.

Under the agreement, Bank of America will make a $1.1 billion cash payment to Assured Guaranty and enter into a loss-sharing arrangement. This reinsurance agreement will reimburse Assured Guaranty for 80% of its losses on the 21 first-lien transactions until the collateral losses exceed $6.6 billion. All in all, that part of the agreement looks to have an expected value of about $500 million right now ... assuming things do not get dramatically worse. (For related reading, see 2010: A Year Of Banking Dangerously)



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Investopedia: Bank of America's Incredible Shrinking Liability

At this point in the credit crisis it would seem that anybody claiming to have a firm handle on everything going on is either crazy, dishonest or a singular genius. Take the latest news from Bank of America (NYSE:BAC) - the terms of a deal to settle much of its liability to Freddie Mac (Nasdq:FMCC) and Fannie Mae (Nasdaq:FNMA) for mortgage put-backs not only surprised most observers, but angered a lot of people all over again. Moreover, there is uncertainty everywhere an investor cares to look regarding whether or not other banks will be able to strike similar deals and how these banks will deal with other claimants.

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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