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Capital One: Financial Winner (Update 1)

Walter Investment Management (WAC) on Monday announced that it had agreed to acquire servicing rights for about 650,000 loans with unpaid balances totaling $93 billion from Bank of America for $519 million, with the transfers taking place during the first and second quarters.

Also on Monday, Nationstar Mortgage (NSM) announced an agreement to buy servicing rights for 1.3 million mortgage loans with unpaid balances totaling $215 billion, for $1.3 billion.

Bank of America's shares were down two cents to close at $12.09. The shares are now up 4% year-to-date. The shares returned 110% during 2012, recovering partially from their 58% swoon during 2011. The shares are still down 8% from the end of 2011.

The shares trade for 0.9 times their reported Sept. 30 tangible book value of $13.48, and for 12.5 times the consensus 2013 earnings estimate of 97 cents a share, among analysts polled by Thomson Reuters. The consensus 2014 EPS estimate is $1.25.

Stifel Nicolaus analyst Christopher Mutascio rates Bank of America a "Buy," with a $13 price target, and in a note on Monday said that he expected the expense reduction from the sale of mortgage servicing rights (MSR) and the "lower future representation and warranty costs" from the Fannie Mae settlement "to result in a pull-forward of normalized earnings for the company."

Mutascio said that his price target for the shares represents a price-to-forward-earnings "multiple of 11.0x our 2014 EPS estimate of $1.20. While this may seem a bit rich, it represents just 8.5x what we believe is BAC's normalized earnings power of roughly $1.50 per share. Further, our target price represents just 83% of our year-end 2014 tangible book value per share estimate of $15.68."

More Cash for Foreclosure Foul-Ups


The Independent Foreclosure Review was part of a previous mortgage foreclosure settlement between Bank of America and other large mortgage servicers, including Citigroup (C), JPMorgan Chase (JPM), Wells Fargo (WFC), U.S. Bancorp (USB), PNC Financial Services Group (PNC) and SunTrust (STI), with the Federal Reserve and the Office of the Comptroller of the Currency. The two regulators on Monday announced that the foreclosure review had ended with the servicers subject to the foreclosure settlement agreeing make $8.5 billion in cash payments and other assistance to borrowers victimized by servicing errors. Borrowers could receive up to $125,000 each.

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