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Bank of America Corp. and some of its largest mortgage investors clashed on Tuesday as the bank vowed to fight government-backed demands that it repurchase loans that allegedly didn't meet underwriting guidelines and other promises. The bank acknowledged receiving a Monday letter from investors alleging that a Bank of America unit didn't properly service 115 bond deals. The investors include Freddie Mac, the government-owned mortgage company. Freddie Mac and Fannie Mae, its larger sibling, have boosted demands on lenders over the past year to buy back defaulted loans that had been sold to and guaranteed by the mortgage titans.
But Tuesday's action marks the first step by either company to force banks to buy back mortgage-backed securities that were issued by Wall Street, not by government-backed mortgage giants. Other investors, some of whom were acting on behalf of their clients, include the Federal Reserve Bank of New York, Neuberger Berman Group LLC, BlackRock Inc., Western Asset Management Co. and Allianz SE's Pacific Investment Management Co., or Pimco, according to people familiar with the matter. The Charlotte, N.C., bank hoped the lifting of its foreclosure sale moratorium would debunk fears that the mortgage process was flawed.
But investors grappled with new concerns Tuesday that the bank could be overwhelmed with investor requests to repurchase flawed mortgages made before the U.S. housing collapse. Its shares dropped 54 cents or 4.4% to $11.80. The shares have declined more than 30% since the end of April amid worries about regulatory reform, lackluster revenues and weak loan demand.
Chief Executive Brian Moynihan quickly vowed to 'push back' on the repurchase requests. "We will diligently fight this," Mr. Moynihan told analysts Tuesday. A spokesman, responding to Monday's letter, added that "We're not responsible for the poor performance of loans as a result of a bad economy. We don't believe we've breached our obligations as servicer. We will examine every avenue to vigorously defend ourselves."
The bank's defiant stance came as it reported a $7.3 billion loss in the third quarter, or 77 cents per share. The loss was largely the result of a $10.4 billion 'goodwill charge' tied to a decline in value of its credit card business. Without the charge, which the company attributes to a regulatory crimp in its debit-card revenue, the bank would have earned $3.1 billion.
No U.S. bank is more vulnerable to an array of political and financial threats posed by home-lending woes. Bank of America has more repurchase requests than any of its rivals and it services one out of every five U.S. mortgages, many of them picked up from California lender Countrywide Financial Corp. in 2008. Worries about sloppy mortgage underwriting and servicing practices clouded discussion of the bank's results Tuesday.
The bank on Oct. 1 said it would suspend foreclosures cases in 23 states where court approval is required and on Oct. 8 said it would halt all foreclosures sales in 50 states. Starting Monday, the bank will begin resubmitting court documents in the first 23 states after the company said an internal review of 102,000 cases found no underlying problems. It and other banks initiated reviews following revelations that "robo signers" had approved hundreds of foreclosure documents a day without examining them thoroughly.
Brian Moynihan
Mr. Moynihan said it would take a few more weeks for the bank to complete its assessment of all 50 states, but so far "we don't see the issues that people were worried about." Concerns about the underlying foreclosure documents amount to "technical issues" that are not a "big deal" for the bank, although he acknowledged it was a "big issue for people who live in the homes". Investors submitted $4 billion in new mortgage repurchase claims during the third quarter, the bank said. Total claims amounted to $12.8 billion at the end of the third quarter, up from $7.5 billion in the year-ago quarter.
The bank has so far set aside $4.4 billion in reserves for these putback attempts, including $872 billion in the third quarter. A majority of the claims are from Freddie Mac and Fannie Mae. The bank said it sold $1.2 trillion in loans to the government-controlled housing giants from 2004 to 2008 and has thus far received $18 billion in repurchase claims on those loans. The bank has resolved $11.4 billion of the $18 billion, recording a net loss of $2.5 billion on those putbacks, or 22%.
The bank also could face more losses on claims from other investors, although Chief Financial Officer Chuck Noski said those figures are harder to predict. "This is an area where there is a lot of speculation and commentary but not a lot of specific claims asserted," he said in an interview. The bank said it had received $3.9 billion in private repurchase claims through the end of the third quarter.
Mr. Moynihan said he isn't interested in a large lump sum payment to make the repurchase issue go away. "We're not going to put this behind us to make us feel good," he said. "We're going to make sure that we'll pay when due but not just do a settlement to move the matter behind us."
Sandler O'Neill + Partners analyst Jeff Harte said in a note that "the actual level of future repurchase remains both a key determinant and an unknown." Nomura Securities analyst Glenn Schorr said in a note it is "tough to convince investors on putback risk". Some analysts also noted several silver linings in Bank of America's results Tuesday.
Excluding the $10.4 billion charge, which the bank attributed entirely to an amendment in the Dodd-Frank financial-overhaul law that limits debit-card income, the bank's third-quarter results exceeded Wall Street estimates. [["Aside from that unpleasantness, Mrs. Lincoln, how did you like the play?": normxxx]] Its $3.5 billion in fixed-income revenue also beat rivals Citigroup Inc. and J.P. Morgan Chase & Co. and credit costs showed improvement. The amount the bank set side for future loan losses was $5.4 billion, compared with $11.7 billion a year ago.
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