Fannie Mae Deal 'Modestly Beneficial' for Bank of America (BAC)

January 7, 2013 1:19 PM EST
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This morning Bank of America (NYSE: BAC) announced a $3.6 billion agreement with Fannie Mae to resolve outstanding repurchase relating to sales by legacy Countrywide products. The bank will also repurchase $6.75 billion certain residential mortgage loans. In addition, Bank of America announced that it signed definitive agreements to sell the servicing rights on 2.0 million residential mortgage loans totaling approximately $306 billion.

Commenting on developments, analyst Matthew H. Burnell said "The agreement with Fannie Mae clears a lingering dispute and should result in lower putback provisions in the future--however, it does not have any effect on outstanding private label or monoline putback requests."

In Burnell's view, the deal is "modestly beneficial" and outweighs the slight negative effect $3.6 billion in net charges will have on Tier 1 common capital in Q4.

"Today's announcement paves the way for BAC to reduce its outstanding balance of pending outback requests from Fannie Mae by $11.2B, as well as the $2.5B putback reserve build BAC will take in Q4. As a result, we think BAC’s overall level of putback requests should shrink meaningfully from the GSEs--and therefore future putback reserve provisions in 2013-14. These have run at largely $300-400MM per quarter for the past year or so, so this should provide a modest EPS benefit," said Burnell

Wells Fargo has a Market Perform rating on Bank of America (NYSE: BAC) with a price target of $11.50 to $13.00.

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