The progress that the Federal Home Finance Agency has made in litigation against Bank of America and other financial institutions could prompt Fannie Mae and Freddie Mac to step up their sales of mortgage bonds, according to research published today by BofA's investment banking unit.
On Monday, BofA became the latest bank to settle with the FHFA, agreeing to a $9.3 billion settlement that will release the bank from all future securities law and fraud claims related to its sale of residential mortgage bonds to the GSEs. It is the seventh such settlement.
The regulator has filed lawsuits against 18 financial institutions with respect to non-agency securities that Fannie and Freddie purchased between 2005 and 2007. The lawsuits alleged that the financial institutions and certain lead underwriters of their securities violated the Securities Act of 1933.
Before theses cases were settled, the GSEs wanted to be holders of the securities in order to have legal rights to litigate. Once litigation is settled, they no longer need to hold them. Moreover, they are under regulatory pressure to reduce their holdings of mortgage bonds.
“Although the FHFA has not yet released their 2014 scorecard with this year’s mandated reductions of the GSEs’ less liquid holdings, we estimate that they have already sold $2.5 billion so far this year, with roughly 90% coming through non-agency sales,” the BofA Merrill Lynch report stated. “Considering that the majority of risk reduction that occurred in 2013 was through CMBS sales, we expect a larger concentration of portfolio sales will come from non-agency sales this year.”
The covered securities in the BofA case included 229 private-label RMBS that were purchased by the GSEs and were the subject of the earlier FHFA lawsuits filed against Bank of America, Countrywide, and Merrill Lynch.
Under the terms of the agreement, Bank of America will pay $5.8 billion to settle all securities law and fraud claims; in addition, it will spend $3.5 billion to repurchase selected securities from Fannie Mae and Freddie Mac.