Bank of America disputes amount of mortgages needing refunds

Oct. 19 (Bloomberg) -- Michael Farrell, chief executive officer for Annaly Capital Management Inc., talks about Pacific Investment Management Co., BlackRock Inc. and the Federal Reserve Bank of New York's attempt to force Bank of America Corp. to repurchase soured mortgages packaged into $47 billion of bonds by its Countrywide Financial Corp. unit. Farrell talks with Pimm Fox on Bloomberg Television's "Taking Stock." (Source: Bloomberg)
By David S. Hilzenrath
Washington Post Staff Writer
Tuesday, October 19, 2010; 7:29 PM

Bank of America disagreed Tuesday with predictions that it could be forced to buy back a staggering amount of mortgages on the grounds that it misrepresented their quality or botched the paperwork when it sold them to investors.

But the nation's largest bank also cautioned that it is largely unable to predict its liability for issuing such refunds.

In segments of the market where Bank of America cannot make confident predictions, it is not putting money in reserve to cover potential claims, bank officials said.

"We don't see the issues that people [are] worried about, quite frankly," chief executive Brian T. Moynihan said in a conference call for investors and analysts as the bank issued its earnings report for the third quarter.

The bank said it lost $7.3 billion in the quarter that ended Sept. 30. That was driven mainly by a $10.4 billion write-down in the value of its card services business as a result of new federal limits on debit card fees.

The bank's stock has taken a pounding recently based largely on fears that it is unprepared for the volume of refunds it will have to issue to make good on assurances it provided about mortgages, known as "representations and warranties."

"We believe that the costs associated with the representations and warranties claims are significant but manageable," bank spokesman Jerome F. Dubrowski said in an interview Tuesday.

The company ended the third quarter facing $12.9 billion worth of claims that it should repurchase mortgages that it misrepresented. That was up from $11.2 billion at the end of the second quarter.

The rate of increase in that measure slowed to 15.4 percent in the third quarter from 26.3 percent in the second quarter.

Bank of America estimated that it was liable for only $4.4 billion in such claims, up from $3.9 billion at the end of the second quarter.

More than half of the pending claims are from the government-backed finance companies Fannie Mae and Freddie Mac.

In the conference call, Chief Financial Officer Charles H. Noski said the bank has enough experience to estimate with confidence its exposure to claims over loans held by Fannie Mae and Freddie Mac. The bank estimates that the $18 billion in claims it has received from Fannie and Freddie for loans issued from 2004 to 2008 represents more than two-thirds of the eventual total.

But Noski said the bank is unable to estimate with confidence how much it might have to pay to repurchase loans from other buyers.

The universe of loans the bank sold to private investors totals about $910 billion, much of which has been paid off. So far, the bank has received claims that it repurchase about $8.7 billion worth from private parties. It has agreed to buy back about $1.6 billion, and about $5.2 billion worth of the claims remain unresolved.

Shares of Bank America closed Tuesday at $11.80, down 54 cents, or 4.4 percent, for the day.

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