Freddie Mac and Bank of America Corp. (NYSE: BAC) are allegedly in discussions to resolve $1.4 billion worth of bad mortgages. Sources revealed to The Wall Street Journal that talks are taking place, but the terms of a potential settlement are unknown. Freddie Mac wants Bank of America to repurchase the loans; if a settlement on this matter is reached, it will be the second between the two entities since 2011.
In 2011, Bank of America announced it had reached two agreements, one with Fannie Mae, the other with Freddie Mac. The bank issued a press release describing the terms. Bank of America agreed to pay $1.52 billion to Fannie Mae and $1.28 billion to Freddie Mac. The settlement dealt with loans originating at Countrywide Financial Corp. Bank of America acquired Countrywide in 2008, the loans under dispute were made prior to Countrywide being combined with Bank of America.
“These actions resolve substantial legacy issues in the best interest of our shareholders,” Bank of America President and CEO Brian Moynihan said in the release. At the time, Bank of America believed the deal significantly reduced any future possibility of being liable for faulty mortgages stemming from Countrywide. Freddie Mac is able to make banks repurchase loans found to violate certain terms. Freddie Mac reviews the loans in question and determines if misrepresentations or violations occurred during the deal. It can then enter into repurchase agreements or other negotiations with the bank. The bank also has a 60-day window to appeal the decision when a repurchase request is issued.
Those contacted by The Wall Street Journal think the settlement underway would protect Bank of America against further action by Freddie Mac on loans made prior to 2012. In 2012, Fannie Mae and Freddie Mac increased efforts to recover losses from the financial crisis through repurchase requests. Reuters contacted Freddie Mac spokesman Michael Cosgrove about the efforts. “We have an obligation to taxpayers to be good stewards of their investment,” Cosgrove stated.
In an October presentation, Freddie Mac included the following information about the unpaid principle balance on repurchase requests. Outstanding requests have grown in the past two years, and in one year, Freddie Mac issued $4.9 billion in new requests.
Bank of America is not Freddie Mac’s only target for repurchase requests. In its third-quarter earnings release, Freddie Mac listed $0.9 billion pre-tax income from Wells Fargo & Company (NYSE: WFC), Citigroup, Inc., (NYSE: C) and SunTrust Mortgage, part of SunTrust Banks, Inc. (NYSE: STI). In late October, Freddie Mac issued a statement saying that JPMorgan Chase & Co. (NYSE: JPM) would pay a total of $3.2 billion under two agreements reached. Donald H. Layton, CEO of Freddie Mac said the “settlements represent solid progress in our continuing efforts to resolve legacy issues and recoup funds that are due to America’s taxpayers.”
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