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Bank of America Is Halfway Home

Tickers in this article: BAC C FMCC FNMA JPM MBIA WFC

NEW YORK (TheStreet) -- The long, rough ride for CEO Brian Moynihan isn't over, but all decks should clear for Bank of America by the end of 2015.

Investors are pleased with Moynihan, sending Bank of America's shares up 24% this year through Wednesday's close at $14.32, after the shares more than doubled during 2011.

As we approach the five-year anniversary of Lehman Brothers' bankruptcy filing at the height of the credit crisis in 2008, it's fascinating to consider the radical transformation of Bank of America and the promise of future glory, as the company expects its earnings to "normalize" during 2015.

Mortgage Mess

It has been a very rough ride for the bank, ever since former CEO Ken Lewis decided in January 2008 it would be a great idea to purchase Countrywide Financial, just as the U.S. residential real estate market was showing signs of a coming collapse. At that time, Bank of America touted Countrywide's "broader mortgage capabilities, including its extensive retail, wholesale and correspondent distribution networks." To Lewis, Countrywide represented "a rare opportunity for Bank of America to add what we believe is the best domestic mortgage platform at an attractive price and to affirm our position as the nation's premier lender to consumers."

Since then, Bank of America ceded its position of top U.S. mortgage originator to Wells Fargo . The bank announced its exit from the wholesale mortgage lending business in October 2010. By that time, it was obvious that during the real estate bubble, mortgage loans made through brokers tended to be lower in quality than mortgage loans made directly by banks. One wonders if Bank of America's due diligence before the Countrywide deal included a sampling of retail loans against brokered loans for underwriting quality.

The Countrywide acquisition eventually led to a very large increase in expenses for Bank of America as it built up a huge Legacy Asset Servicing staff to work through problem loans. The company also struggled to deal with mounting mortgage repurchase demands from investors, which peaked at $28.278 billion at the end of 2012.

Major mortgage settlements included a $2.8 billion settlement with Fannie Mae and Freddie Mac in January 2011, followed by an $8.5 billion settlement with private investors in June 2011, which is still being contested by some investors, but was fully reserved for, at that time. Other major settlements included a $10.4 billion deal with Fannie Mae in January.

The company's most recent major mortgage settlement was with MBIA in May. According to a press release issued by Bank of America regarding that "comprehensive settlement," the bank agreed to pay the bond insurer $1.6 billion in cash and an additional $137 million to "remit to MBIA all of the outstanding MBIA 5.70% Senior Notes due 2034 that Bank of America acquired through a tender offer in December 2012." The bank also agreed to "terminate all of its outstanding credit default swap (CDS) protection agreements purchased from MBIA on commercial mortgage-backed securities (CMBS), as well as terminate certain other trades in order to close out positions between the companies."

As part of the innovative deal, Bank of America provided MBIA with a $500 million secured credit line. In return, MBIA agreed to issue warrants allowing Bank of America to purchase 9.94 million MBIA shares for $9.59 a share, which can be exercised at any time through May 2018. The warrants enable Bank of America to acquire up to 4.9% of MBIA's common shares.

In addition to all of the mortgage putback settlements, Bank of America, as the largest loan originator (including Countrywide) through the real estate bubble, agreed in March 2012 to contribute roughly $8.6 billion as part of the industry's $25 billion mortgage foreclosure settlement with state and federal regulators.

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