Bank of America Corp (NYSE:BAC) is set to pay Federal National Mortgage Association (OTC:FNMA) a $3.6bn cash settlement. The company will also repurchase a portfolio of residential mortgage loans for a further $6.75bn in a deal intended to settle representations and warranties claims related to residential mortgage loans for a nine year period which ended in 2008.

Bank of America

The claims originate from the housing bubble, when Bank of America Corp (NYSE:BAC)’s subsidiary Countrywide Financial, was found to be among   the firms, who loosened lending standards in order to create and package mortgages into investment products.

The bank says that the cash payment of $3.6bn, along with the repurchase of $6.75bn in certain residential mortgage loans sold to Federal National Mortgage Association (OTC:FNMA), which the BofA has valued at less than the purchase price, will substantially resolve outstanding claims for compensation.

The Bank of America Corp (NYSE:BAC) announced the settlement on Monday, saying that it expects these payments to be “covered by existing reserves and an additional $2.5 billion (pretax) in representations and warranties provision recorded in the fourth quarter of 2012.”

Despite the deal hitting the bank’s pre-tax fourth quarter earnings by roughly $2.7bn, the company still “expects modestly positive fourth-quarter 2012 earnings per share.”

The bank will also sell servicing rights on approximately two million residential mortgage loans, totalling $306bn to two separate counterparties; Nationstar Mortgage Holdings Inc (NYSE:NSM) and Walter Investment Management Corp (NYSEAMEX:WAC).

The rights will allow banks to earn fees from mortgage investors, in return for collecting home loan payments from borrowers.

Reuters reported on Friday that the BofA was also in talks to sell the collection rights on $300bn  mortgages,  this is intended to lessen its exposure from its 2008 acquisition of Countrywide Financial Corp in 2008.

“Together, these agreements are a significant step in resolving our remaining legacy mortgage issues, further streamlining and simplifying the company and reducing expenses over time,” CEO Brian Moynihan said in a statement.

Bank of America Corp (NYSE:BAC)’s shares were up by 2.4 percent to $12.40 in pre-market trading on Monday, creating a 52-week high.

While BAC essentially gives up yet another quarter of EPS, it takes yet another step in putting extensive legacy issues behind it (still other issues, particularly private label securitizations/securities litigation, remain).  Not enough details to get a full read on the quarter.