FINANCIAL SERVICES

BofA to buy back $330M of mortgages from Freddie Mac

BLOOMBERG FILE PHOTO/JIN LEE
BANK of AMERICA Corp. signage is displayed above the entrance to a branch in New York, U.S.
Posted 5/23/12

NEW YORK - Bank of America Corp., the second- biggest U.S. lender, will repurchase $330 million of home loans from Freddie Mac, the mortgage company supported by taxpayers, after flaws were found in how they were created.

Payments on the “vast majority” of the loans are current, according to Dan Frahm, a spokesman for the Charlotte, N.C.-based bank. McLean, Virginia-based Freddie Mac disclosed the buybacks in a statement yesterday, without directly citing the lender.

Bank of America agreed to the refunds “because the valuation method used at origination did not meet the investor’s technical requirements,” Frahm said in an e-mail, adding that the flaws have been fixed. Brad German, a spokesman for Freddie Mac, declined to comment.

Chief Executive Officer Brian T. Moynihan is seeking to limit further losses at the bank after booking more than $42 billion in costs tied to defective home loans. Buyers and insurers of mortgage securities have demanded compensation for shoddy debt created by Countrywide Financial Corp., which Bank of America bought in 2008 when the target ranked as the nation’s biggest residential lender.

Previous Settlement

Freddie Mac and Bank of America announced a $1.28 billion settlement in January 2011 over bad loans sold through 2008 by Countrywide. Other business between the companies wasn’t covered by the deal, and at least some of the loans covered by Freddie Mac’s latest announcement have more recent origination dates, according to data compiled by Bloomberg.

Banks sell mortgages to investors and government-backed enterprises with a promise to buy them back if data on borrowers, their income or the property later turn out to be false.

Bank of America’s backlog of pending demands for refunds on soured loans reached a record $16.1 billion in the first quarter as a dispute deepened between the bank and Fannie Mae, the other government-controlled mortgage finance firm. Fannie Mae stopped accepting new loans from Bank of America in January.

The government bailed out and seized both Fannie Mae and Freddie Mac during the credit crunch.

Moynihan told investors at a conference this week that reserves will blunt the costs of claims and litigation. “A lot of that has been put on the balance sheet,” he said.

Damage to Investors

Bank of America’s buyback of the loans, which are now packaged into securities guaranteed by Freddie Mac, will damage bond investors while the lender winds up owning mortgages that pay more interest than it could get from making new ones at today’s prevailing rates.

The weighted average interest rate on loans in the securities listed in Freddie Mac’s statement as most affected by the buybacks is 5.91 percent, compared with typical rates on new loans of less than 4 percent, according to Bloomberg data.

The loans to be repurchased account for 52 percent of the collateral for those bonds, which are trading at almost 110 cents on the dollar, according to Bloomberg Valuation prices. Investors will paid off at par -- 100 cents on the dollar -- and will lose their above-market interest rates.

Investors holding similar mortgage-backed securities may be concerned they’ll suffer a similar fate, Barclays Plc analysts Nicholas Strand, Sandipan Deb and Siddarth Ramkumar wrote in a report.

“It is also unclear if this is a one time-issue or a process that will be revisited at some regular interval,” the Barclays analysts wrote. “Another concern would be whether similar buyouts are being considered or being implemented at Fannie Mae.”

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