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Is This the Last Shoe to Drop for B of A?

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Two days ago, in an column titled "Steer Clear of Bank of America," I quoted a Foolish colleague of mine who told me some time ago that with Bank of America (NYSE: BAC  ) , "you just don't know when the other shoe's going to drop." I think it just did, and unfortunately for investors, it's more like a boot.

The demon Countrywide strikes again
The New York Times is reporting that B of A has agreed to pay government-run mortgage-guarantee giant Fannie Mae more than $10 billion to settle claims on home loans originated in the run-up to the financial crash: loans that were sold to Fannie Mae and eventually went south. Unsurprisingly, most of the loans were issued by Countrywide Financial, the mortgage-origination giant B of A acquired in 2008. 

Under the terms of this deal, Bank of America will pay Fannie $3.6 billion outright, and also buy back $6.75 billion in said bad mortgages that are still on Fannie's books.  Fannie and Freddie Mac have both lost billions in the last few years because of poorly vetted mortgages, many originally issued by Countrywide . According to The Times, even before this massive settlement, Countrywide had cost B of A "more than $40 billion in losses on real estate, legal costs and settlements." 

In the same announcement, B of A said it will sell the servicing rights on about 2 million loans it currently services for Fannie, Freddie, and Ginnie Mae. These loans include 232,000 loans classified as 60-day plus delinquent mortgage loans.

It's positively raining shoes
Coincidentally, a deal was also announced today between federal regulators and 10 of the country's major banks to settle claims of "foreclosure abuses" and "bungled loan modifications" arising out of the housing bubble. B of A is one of the participating banks, as are fellow superbanks JPMorgan Chase (NYSE: JPM  ) and Citibank (NYSE: C  ) . The total amount of that settlement is $8.5 billion, but there's no word yet on what B of A's share will be. 

Foolish financials guru Anand Chokkavelu thinks the coincidence of these two massive agreements is perhaps not so coincidental: "Given the timing of the settlements, I'd guess that the stress tests (submissions are due today) have something (read: everything) to do with this. Taking out these uncertainties will allow the banks to argue more convincingly for the return of capital to shareholders."

Whatever's behind the timing, if anything, it now looks like B of A is on the hook for not just $10 billion to Fannie, but likely a good deal more when you count in this second settlement. Is this the final shoe, or rather shoes, to drop for B of A?

Investing in companies you can get your heard around
In my Saturday column, I argued that a bank as big as B of A -- and let's throw in JPMorgan and Citigroup for good measure -- is extraordinarily difficult if not outright impossible for the average investor to get his or her head around. With more than $2 trillion in total assets, and lines of business spanning personal checking accounts to investment banking, how could it be otherwise?

"Together, these agreements are a significant step in resolving our remaining legacy mortgage issues," CEO Brian Moynihan said in a statement announcing the Fannie deal, "further streamlining and simplifying the company and reducing expenses over time." I know B of A is undergoing a transition right now, and that Moynihan and his team are trying their best to make the bank more focused, more nimble, and more comprehensible, not just for investors but for management as well.

I also know that investors who got into B of A at the beginning of 2012 and stayed in saw their equity double. That was a brilliant call, better than any I made for myself in 2012, but that doesn't necessarily make B of A the place to be for the long run. Even if these two agreements signal the end of federal and regulatory payouts, it doesn't necessarily mean the end of shareholder or other civil payouts.

Maybe this polishes off the bulk of B of A's mortgage-related difficulties, maybe it doesn't. Did anyone see these coming? What else is lurking? Can a bank that couldn't properly evaluate an acquisition's balance sheet five years ago necessarily do any better with its own today? I don't know if the Foolish colleague I quoted in the first paragraph still thinks there are any shoes left to drop for Bank of America, and I don't know for sure either, but I do know I'm not ready yet to take any chances with my investing dollars. 

Every party needs a pooper, and when it comes to B of A, that's me. But don't let that be the last word you hear when it comes to investor-darling Bank of America. Instead, check out The Motley Fool's brand-new report on B of A. Our analysts give you a thorough detailing of the superbank's prospects along with three reasons to buy and three reasons to sell. Just click here for full access. 

Read/Post Comments (2) | Recommend This Article (4)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On January 07, 2013, at 6:39 PM, jkahlon wrote:

    With housing rebounding all over BOA should get a positive boost for now and a few years to come.

    There are multiple regions where getting a house is extremely difficult and buyers are forced to bid against others.

    Really not sure why most analysts try to take a view against the grain all the time. Possibly they are doing the opposite to what they are telling others.

    This is not specific to the comments here but more to what a lot of analysts say in public.

  • Report this Comment On January 08, 2013, at 10:50 AM, XMFGrgurich wrote:

    Going against the grain gets people's attention. :->

    But with BAC, for me, Foolish investing is about investing in companies you can get your head around. Maybe some people can with BAC. I can't. Now, I own shares of GS. Goldman, I feel, I can get my head around. And I have great trust in management.

    A Foolish colleague is already calling this the great house-cleaning that BAC needs; that it can now move on unburdened into sunlit pastures. Maybe, or maybe there's more lurking about.

    Cheers. Thanks for writing.

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