BofA settlement: Bank of America’s shareholders need all the good news they can get. But the reaction to the bank’s $3 billion mortgage settlement with Fannie Mae and Freddie Mac was just a tad too giddy.
At first blush, the 5 percent share gains might look reasonable. After all, the deal means BofA has spent a total of around $5.5 billion to buy back mortgages sold to Fannie and Freddie that it now agrees weren’t up to snuff. That’s far less than the $21 billion worst-case scenario touted by hedge fund Branch Hill Capital, which spooked investors last autumn. It’s also about $500 million less than BofA’s own expectations.
That leaves shareholders already looking too exuberant: the $500 million boost is worth $4.75 billion to shareholders at BofA’s current multiple of 9.5 times this year’s expected earnings.
But investors have added more than half as much again to the bank’s valuation. The deal also doesn’t exactly draw a line under all of BofA’s exposure to the two housing agencies. First, it addresses only loans sold to Fannie and Freddie by Countrywide. That business, which BofA bought in 2008, accounts for the vast majority of the bank’s clawback demands from the agencies, but not all of them. Second, the settlement makes “certain assumptions regarding economic conditions, home prices and other matters.” In other words, Fannie and Freddie get a do-over if the economy worsens.
Finally, there’s more to bad home loans than just the government-sponsored enterprises. Investors still have little to no clarity on how much BofA may have to pay to settle claims from insurers and investors who between them bought $910 billion of non-agency mortgages issued by BofA’s various home loan businesses between 2004 and 2008.
Those claims are harder for buyers to prove than those submitted by Freddie and Fannie. The uncertainty is a concern, though the claims are unlikely to cost BofA the $52 billion posited by Branch Hill.
A sigh of relief is certainly warranted over BofA’s shedding most of the Fannie/Freddie overhang. But shareholders shouldn’t be overly optimistic about the bank’s apparent new year’s resolve.
