The Federal authorities are now seeking $2.1 billion in penalties from Bank of America Corp. (BAC) for the sale of risky residential mortgage-backed securities (RMBS). The RMBS were sold by Countrywide Financial Corp., which was acquired by BofA in 2008, to Fannie Mae (FNMA) and Freddie Mac (FMCC).
The latest penalty is more than double the fine of nearly $864 million demanded earlier. The present amount is based on the total revenue that BofA earned from the loans, while the earlier amount took into consideration the losses incurred by Fannie Mae and Freddie Mac from the purchase of RMBS.
The case revolves around the RMBS sold by Countrywide between Aug 2007 and May 2008. The loans underlying these RMBS were given without proper assessment of the creditworthiness of borrowers.
The Federal prosecutors accused Countrywide of creating the program 'high-speed swim lane' (:HSSL) or 'Hustle,' which rewarded employees for the quantity rather than quality of loans. These loans were then bundled and sold to Fannie Mae and Freddie Mac.
Notably, BofA has until Feb 26 to respond to the latest filing, while the aggregate penalty will be decided by U.S. District Judge Jed Rakoff after the hearing starts on Mar 13.
BofA continues to suffer from flaws in Countrywide’s transactions prior to the financial crisis. The company has incurred more than $30 billion in losses from bad loans, MBS claims and lawsuits.
Though BofA has settled quite a few lawsuits related to Countrywide, it still faces numerous litigations that could weigh on its financials going forward. One such legal headwind is the $8.5 billion settlement with institutional investors that is still awaiting court approval.
Currently, BofA carries a Zacks Rank #2 (Buy). Another major global bank worth considering is BB&T Corp. (BBT), which has the same Zacks Rank as BofA.
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- Freddie Mac
- Fannie Mae
- Fannie Mae and Freddie Mac