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BofA Says Loan Repurchase Costs May Exceed Previous Forecast

Bank of America Corp. (BAC), the largest U.S. lender, posted its worst two-day decline since 2009 after telling investors that claims from Fannie Mae and Freddie Mac may cost more than previously forecast.

The bank fell 7.5 percent yesterday in New York Stock Exchange composite trading, the biggest drop in the Dow Jones Industrial Average, and extended its slide for the past two sessions to 15 percent. New demands for refunds on soured loans from the two U.S.-owned mortgage firms are coming “in numbers that were not expected based on historical experience,” the company said in its Aug. 4 quarterly report to regulators.

The filing signals that the $30 billion of expenses booked by Brian T. Moynihan since he became chief executive officer still may not be enough to clean up the faulty mortgages inherited from former CEO Kenneth D. Lewis. The Charlotte, North Carolina-based firm told investors in June that actions taken during the second quarter probably would cover any further buybacks unless Fannie Mae and Freddie changed their stance.

“Yet again, another line in the sand from Bank of America turns out to be fungible,” said Tony Plath, a professor of finance at the University of North Carolina in Charlotte. “I don’t think it’s anything nefarious, it’s just that they don’t know what the magnitude of losses in that portfolio will be -- and until they do, none of their numbers have credibility.”

Stock Reaction

Bank of America fell more than all its biggest peers, with Citigroup Inc. (C) sliding 3.9 percent, Wells Fargo & Co. dropping 2.1 percent and JPMorgan Chase & Co. (JPM) off less than 1 percent. The decline to $8.17 a share left Bank of America down 39 percent this year, dogged by concerns that mortgage expenses and a stagnating U.S. economy will crimp profit and force it to bolster capital by selling new shares.

The last time the bank traded at this level was in April 2009, the month when Lewis was ousted from the chairman’s post amid doubts about the bank’s purchases of Merrill Lynch & Co. and Countrywide Financial Corp., the subprime lender whose mortgages are generating most of the buyback claims.

The possibility that Fannie Mae and Freddie Mac will step up their demands increased the risk that Bank of America may have to raise capital, Ed Najarian, head of bank research at International Strategy & Investment Group, said in a note to clients. Moynihan has repeatedly said this year that the firm won’t need to issue common stock.

Fannie Mae’s Pressure

Fannie Mae faces its own pressures, with the mortgage firm reporting a $2.9 billion second-quarter loss yesterday and asking for another $5.1 billion in federal aid. The company, which was seized by the government in 2008 to save it from insolvency, has drawn $104.8 billion in U.S. assistance.

Fannie Mae can request a buyback if a mortgage insurer denies coverage for a Bank of America loan, even when the lender disputes the insurer’s decision, according to the bank’s filing. Companies currently have three months after being denied coverage to appeal the repurchase demand and will have just 30 days starting in July 2012, Bank of America said.

“This announcement could result in more repurchase requests from Fannie Mae than the assumptions in our estimated liability contemplate,” Bank of America said. The lender may not be able to resolve insurance disputes in time, meaning that “our representations and warranties liability may increase.”

Bank of America said in a May filing that the behavior of the two government-sponsored enterprises, or GSEs, “continues to evolve” and that claims had increased in the first quarter. The firm’s disclosure elaborates on that theme, said Larry DiRita, a bank spokesman.

“We have previously disclosed that GSE behavior is evolving in a way that diverges from our longstanding course of dealing with them,” DiRita said in an e-mail. “We have taken into account and will continue to closely monitor and assess the possible risks associated with these changed behaviors.”

Damage Control

In January, the bank disclosed the $3 billion in settlements with Fannie Mae and Freddie Mac. Assuming stable housing prices and that the behavior of the GSEs didn’t change, the accords “largely addressed” those liabilities, the bank said, and Moynihan told investors that management was “pleased to put the GSEs behind us.”

Since then, the bank has announced more than $15 billion in additional provisions for loan repurchases. While most of that is tied to an $8.5 billion settlement with institutional investors, some of the new expenses are tied to Fannie Mae. Amy Bonitatibus, a spokeswoman for Washington-based Fannie Mae, declined to comment.

Countrywide’s Legacy

The accord is subject to court approval. New York Attorney General Eric Schneiderman asked a judge to reject the settlement, saying that Bank of New York Mellon Corp. violated state law as part of its role representing investors in mortgage securities created by Countrywide.

“The proposed cash payment is far less than the massive losses investors have faced and will continue to face,” Schneiderman said in a filing in state court in Manhattan.

Ron Gruendl, a BNY Mellon spokesman, said the attorney general’s allegations are “outrageous, baseless, unsupported by fact” and that the company will fight them in court if needed.

Bank of America warned investors in its filing that if it fails to get court approval on the deal, the $14 billion in second-quarter provisions for repurchase costs from institutional investors “could be insufficient” and its costs could balloon. The firm already expects $5 billion in additional costs from repurchase demands from non-GSE mortgage buyers.

Resolving the firm’s housing-market liabilities “could have a material adverse effect on our cash flows, financial condition and results of operations,” the bank said.

Matthew Burnell, an analyst at Wells Fargo & Co. (WFC), cut his recommendation on Bank of America to “market perform” from “outperform” in a research note because of lower expectations for the U.S. economy.

To contact the reporter on this story: Hugh Son in New York at hson1@bloomberg.net

To contact the editors responsible for this story: David Scheer at dscheer@bloomberg.net Rick Green at rgreen18@bloomberg.net

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