Think “troubled mortgages” and the first name that pops to mind is likely Bank of America (NYSE:BAC). Unfortunately it does not look like this stigma is going away for the troubled bank anytime soon. As if the long list of mortgage-related lawsuits against the bank was not enough, Bank of America could now be in some trouble with the Federal National Mortgage Association (FNMA), also known as Fannie Mae. The government-sponsored enterprise stopped just short of blaming the bank outright for its dismal performance in Q4 2011.  Fannie Mae wants Bank of America to honor repurchase requests worth $5.5 billion at the end of 2011 – a figure that equals a whopping 60% of all of Fannie’s repurchase requests. In contrast, Bank of America’s competitors JPMorgan Chase (NYSE:JPM), Citigroup (NYSE:C) and Wells Fargo (NYSE:WFC) have $1.1 billion, $917 million and $830 million respectively in outstanding repurchase requests from Fannie Mae.
For now, we stick to our $8.50 price estimate for Bank of America’s stock which is about 5% above the current market price. But we acknowledge that there is some downside to this value should the bank be forced to repurchase all or a large part of this disputed mortgage portfolio.
- Bank of America Does Well In Q3 To Chip Away At Costs Even As Revenues Trend Higher
- How Have Total M&A Deals Closed By Major U.S. Investment Banks Trended In The Last 5 Quarters?
- What Was The Share Of Major U.S. Investment Banks In The Global M&A Industry For Q3?
- How Have Equity Underwriting Deals Closed By U.S. Investment Banks Trended In The Last 5 Quarters?
- How Have Debt Origination Deal Volumes For U.S. Investment Banks Changed In The Last 5 Quarters?
- How Much In Equity Capital Market Deals Did The 5 Largest U.S. Banks Underwrite In Q3?
Mortgage insurers reportedly rejected 25% more insurance claims last year than they did in 2010, forcing Fannie Mae to hand out substantially more repurchase requests to the country’s largest mortgage originators.  And Bank of America’s ailing mortgage business, which went from bad to worse with the acquisition of Countrywide, obviously figures at the top.
Bank of America incurred mortgage-related settlement, provision and other litigation expenses of nearly $20 billion in 2011 – more than the $13 billion and $15 billion in similar costs for 2009 and 2010, respectively. If Fannie Mae has its way, this figure will end up elevated for 2012 as well.
To make matters worse, Fannie Mae intends to reduce the deadline for banks to appeal against an insurer’s denial from the current 90 days to 30 days starting in July. This would just add to the pressure on Bank of America to begin repurchasing these disputed mortgages.Notes:
- BofA Clash With Fannie Intensifies as Insurers Reject Loans, Bloomberg, Mar 3 2012 [↩] [↩]