BofA's Settlement with Fannie Mae

On Monday, Bank of America Corporation (BAC - Analyst Report) announced a settlement with Fannie Mae (FNMA) worth about $10.3 billion. The settlement includes the resolution of all outstanding and potential repurchase along with other claims relating to all major residential mortgage loans originated and sold directly to Fannie Mae by BofA from January 1, 2000 through December 31, 2008.

Moreover, BofA signed definitive agreements to vend the servicing rights on 2 million residential mortgage loans worth $306 billion as of November 30, 2012.

Such moves by BofA at the very onset of the New Year demonstrate the company’s aim to resolve all mortgage related issues, thereby reducing costs over the upcoming period. Moreover, such settlements are anticipated to aid in the further revival of the economy. Alongside, such strategic decisions are expected to bode well for BofA and help it gain investors’ confidence.

Settlement with Fannie Mae

Along with buy back worth $6.75 billion of residential mortgage loans from Fannie Mae, BofA will make cash payment of $3.6 billion. Moreover, an undisclosed cash payment for settling almost all Fannie Mae’s outstanding and future claims related to delays in foreclosures has been announced.

Collectively, these settlements are anticipated to lessen BofA’s pre-tax income by about $2.7 billion in the fourth quarter of 2012.

Agreements to Vend Mortgage Servicing Rights (MSR)

Two definitive agreements have been signed by BofA with two different counterparties to vend the servicing rights on some residential mortgage loans. Notably, these loans were serviced for Fannie Mae, Freddie Mac (FMCC), the Government National Mortgage Association (Ginnie Mae) and private label securitizations. However, these transactions await the approval of certain third parties.

Further, these transfers of MSRs are scheduled to occur in stages in 2013. The aforementioned transactions are anticipated to record a benefit of about $650 million over the book value of MSRs. Specifically, half of this amount is to be recorded in the fourth quarter of 2012, while the remaining is estimated to be recorded in the upcoming quarters at the time of servicing transfers.

BofA currently retains a Zacks #3 Rank, which translates into a short-term Hold rating. We believe such settlements will augur well for the company and help boost earnings, inducing shareholders’ confidence, which might lead to positive earnings estimate revisions. This, in turn, could cause an upgrade in the Zacks Rank.