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Bad Mortgages Still Haunt Bank of America

Under Chief Executive Officer Brian T. Moynihan, Bank of America (BAC) is spending billions of dollars to deal with the aftermath of the housing bust, reaching settlements with mortgage bond investors and insurers and setting aside funds for future claims. The cleanup effort hasn’t yet convinced analysts and investors that the bank is ready to put the mortgage mess behind it.

Charlotte (N.C.)-based Bank of America, the nation’s largest bank by assets, announced a quarterly loss of $8.83 billion on July 19, the biggest in its history. The mortgage unit’s loss widened to $14.5 billion, from $1.5 billion a year earlier. Moynihan has called his company a “tale of two cities,” because its non-mortgage operations are making money. Global commercial banking reported the highest net income since the second quarter of 2009, according to the bank.

Yet Moynihan still finds himself writing checks to settle disputes inherited from the 2008 takeover of subprime lender Countrywide Financial, where lax underwriting led to soaring defaults on mortgages and claims from investors who bought or insured them. Overall, Moynihan has booked about $30 billion in settlements and writedowns to clean up mortgage liabilities since succeeding Kenneth D. Lewis last year.

Earlier this year the Federal Reserve rejected Bank of America’s request to raise its quarterly dividend, now 1¢ a share, and analysts say a significant dividend boost may be years away. “The charges have had the effect of reducing mortgage uncertainty but have pushed dividend increases further into the future,” Richard Staite, an analyst with Atlantic Equities, wrote in a June 30 note.

Another challenge: Staite and Jason Goldberg, a Barclays Capital analyst, both estimate that Bank of America needs to raise $50 billion to comply with the new international capital standards that will take effect over several years. “It’s phased in over time, so there’s time to meet the requirement,” says Jerry Dubrowski, a Bank of America spokesman. Banks can meet capital requirements by selling stock, retaining earnings, or reducing assets.

Investors remain skeptical. On the day of the earnings announcement, the stock sank to $9.40, the lowest level since May 2009, before closing at $9.57. It has fallen 28 percent this year, making it the worst performer of the 24 stocks in the KBW Bank Index. Paul Miller at FBR Capital Markets (FBCM) says doubts about the bank’s earnings power may prompt more selling. “We need more confidence in the numbers,” Miller said on July 19. “A lot of analysts are going to lower their ratings.”

The bottom line: Investors have knocked about $38 billion off Bank of America’s market value this year as mortgage costs continue to dent earnings.

Son is a reporter for Bloomberg News.

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