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According to a report in the Wall Street Journal, Bank of America Corporation (BAC - Analyst Report) is negotiating with Freddie Mac (FMCC) to settle a mortgage repurchase dispute. The dispute concerns more than $1.4 billion worth of faulty mortgages that BofA sold to Freddie Mac in the period preceding the financial crisis.

As of Sep 30, 2013, Freddie Mac had $1.4 billion as repurchase demand from BofA. This was nearly 42% of Freddie Mac’s total repurchase demand.

The terms of the settlement are yet to be decided. Though it is difficult to determine the actual amount that will be paid to settle the claims, banks often pay more so as to avert any further repurchase demands on loans sold in the past.

Freddie Mac, along with Fannie Mae (FNMA) can compel banks to buy back mortgages that do not abide by the prescribed guidelines. Notably, since 2009, both these Government-Sponsored Enterprises (GSEs) have forced many lenders to repurchase bad loans worth billions of dollars. Additionally, the Federal Housing Finance Agency (FHFA), the conservator for these two firms, has set a goal to complete review of all loan files for breaches of representations and warranties related to loan activity prior to 2008.

For BofA, the deal if finalized will be the second such agreement with Freddie Mac. In Jan 2011, BofA had reached a $3 billion agreement with Freddie Mac and Fannie Mae to resolve faulty mortgage loans sold by Countrywide Financial Corp. BofA had acquired Countrywide in 2008.

Moreover, earlier this year, BofA agreed to settle its mortgage dispute with Fannie Mae. The company paid $11.6 billion in total, which included $6.7 billion of loan repurchases.

Over the last several months, Freddie Mac reached settlements with Wells Fargo & Company, Citigroup Inc., JPMorgan Chase & Co. (JPM - Analyst Report) and SunTrust Banks, Inc. The compensation totaled approximately $2.4 billion.

The present deal, if finalized, will protect BofA from future repurchase claims from Freddie Mac for loans sold prior to 2012.

Currently, BofA carries a Zacks Rank #3 (Hold).

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