Bank  of America has entered into an $11.6 billion settlement to end Fannie Mae's  claims that the bank improperly sold it mortgages that later soured, and to  resolve problems with foreclosures,  the companies said.

The settlement is a major step for Bank of America toward resolving claims  from investors who want the bank to buy back loans that its Countrywide  Financial subsidiary sold to them during the housing boom, many of which later  went bad.

The agreement largely covers the $11.2 billion of claims that  government-owned finance company Fannie Mae had against the bank, which  represented about 44 percent of the bank's total pending claims at the end of  the third quarter.

Bank of America, which bought Countrywide in 2008, still needs court approval  for an $8.5 billion settlement with private investors and is locked in  litigation with insurer MBIA Inc over mortgage-related claims.

The settlements, other charges, and a series of asset sales the bank also  announced Monday will result in Bank of America posting only a small profit for  2012's fourth quarter. Bank of America is paying $3.6 billion to Fannie Mae and  buying back $6.75 billion of bad loans from the mortgage company to clear up all  claims that government-owned Fannie Mae had made against the bank. Bank of  America is buying the loans for the value of their outstanding principle, and  will immediately record a loss on them.

Fannie Mae and its sibling, Freddie Mac, essentially buy mortgages from banks  and package them into bonds for investors. But in the mortgage boom, banks sold  loans to the two companies that Fannie Mae and Freddie Mac say should never have  been sold, because for example, borrowers had misstated their income. The two  mortgage finance companies are pushing banks to buy back the loans.

Bank of America said most of the repurchasing settlement would be covered by  reserves, and another $2.5 billion, before taxes, that it set aside in the  fourth quarter.

A separate settlement over foreclosure delays will result in Bank of America paying $1.3 billion to Fannie Mae, the  mortgage company said. Bank of America had already set aside money to cover most  of that, but took another $260 million charge in the fourth quarter to cover the  balance.

Bank of America also sold the rights to collect payments on about $306  billion of loans to Nationstar Mortgage Holdings and Walter Investment  Management Corp. Nationstar is paying $1.3 billion for the right to service some  $215 billion of loans, while Walter Investment is paying $519 million for the  right to service about $93 billion of mortgages.

Reuters first reported on Friday that Bank of America was talking to  Nationstar and Walter Investment.

Bank of America is eager to reduce expenses in its mortgage servicing unit,  where costs have ballooned as the bank has hired staff to work with customers  behind on payments and those seeking alternatives to foreclosure such as Bank  of America loan modifications and short sales. The unit now has nearly  42,000 employees, about 15 percent of the bank's total workforce.

At the end of December, Bank of America had 775,000 home loans that were  delinquent by 60 days or more, down from 936,000 loans at the end of September.  After the latest sale, the bank said this number will decline substantially.

The No. 2 U.S. bank by assets has lagged peers in recovering from the  financial crisis largely due to losses from its disastrous Countrywide  acquisition. The bank has paid more than $40 billion to settle lawsuits and to  buy back soured loans.

Two years ago, Bank of America reached settlements with Fannie Mae and  Freddie Mac over loan repurchase requests. The pact with Freddie Mac covered all  outstanding claims, but the agreement with Fannie Mae covered only claims that  were already in the works. Fannie Mae later began sending new claims to the bank  over loans originated during the housing boom, spurring the dispute between the  two companies.

Bank of America said Monday it will take an additional $2.5 billion expense  in the fourth quarter for a settlement with federal regulators over improper  foreclosures as well as other mortgage-related matters. The results will also  include a $700 million charge related to the value of the bank's debt and a $1.3  billion tax benefit.
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READ THE ORIGINAL ARTICLE HERE (Reporting By Rick Rothacker; Editing by Dan Wilchins, Maureen Bavdek and David Gregorio)