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BofA May Sell, Shut Correspondent Mortgage Unit as It Seeks to Cut Losses

Bank of America Corp. (BAC), the largest U.S. lender, plans to sell or shut its correspondent-mortgage unit as Chief Executive Officer Brian T. Moynihan seeks to stop losses on home loans.

“We intend to sell the correspondent-mortgage lending division or, if a suitable deal is not identified, we will consider other options,” including winding down the business, Dan Frahm, a company spokesman, said in an e-mail today. For now, those operations “continue business as usual,” he wrote.

Moynihan, 51, is selling assets and overhauling mortgage operations, which had a $14.5 billion loss in the second quarter as investors demanded the firm buy back soured loans. The Charlotte, North Carolina-based bank split the division earlier this year, separating distressed loans from performing mortgages and new lending.

“They’ve gotten the picture of what they need to do,” said Marty Mosby, a Nashville, Tennessee-based analyst at Guggenheim Securities LLC, which manages more than $100 billion, including Bank of America shares. “They’re following that prescription pretty aggressively at this point, which is a positive sign that management has finally gotten their hands around what they need to do here.”

Bank of America is in talks with a potential buyer for the correspondent business, Frahm said, declining to identify the party.

Correspondent loans are typically originated by third-party firms, which then sell them to larger lenders, such as Bank of America. If the loans sour, buyers can ask originators to repurchase the debt.

Outstanding Claims

Bank of America said in a regulatory filing this month that correspondent loans accounted for 27 percent of outstanding claims as of June 30. Many of the correspondent firms that had sold loans to Bank of America during the housing boom between 2004 and 2008 are no longer in business, leaving the company unable to recover funds, it said.

Hundreds of mortgage banks and brokers collapsed in 2007 and 2008, including Melville, New York-based American Home Mortgage Investment Corp. (AHMIQ) and Atlanta-based HomeBanc Corp.

About 1,400 employees run Bank of America’s correspondent operations, which are overseen by John Dixon, Frahm said. Dixon reports to Barbara Desoer, the firm’s head of home loans.

“There is no impact to this team at this time, and ultimate decisions will be determined as part of the potential sale process,” he said.

‘Very Close Look’

Bank of America said last month that changing capital rules were pushing it to take on fewer new contracts to oversee outstanding debt, a key part of the correspondent mortgage business in which closed loans are bought from the initial lenders and usually resold.

“We’re taking a very close look at the types of activities we’re originating and servicing, so on the front end, you’ll see actions where we look to scale back,” Chief Financial Officer Bruce Thompson said during a July 19 conference call.

Correspondent originations accounted for $21.8 billion, or 54 percent, of the bank’s mortgage lending in the second quarter of 2011, Frahm said. This compared to $27.4 billion, or 46 percent, in the first quarter.

Bank of America climbed 11 cents, or 1.4 percent, to $8.22 in New York Stock Exchange composite trading as of 2:07 p.m. The shares have slid 38 percent this year, compared with a 23 percent drop in the 24-company KBW Bank Index. (BKX)

Moynihan has booked about $30 billion in housing-related charges since replacing Kenneth D. Lewis as CEO at the start of 2010, mostly because of the 2008 takeover of subprime lender Countrywide Financial Corp.

The company agreed this week to sell about half its stake in China Construction Bank Corp. for a $3.3 billion gain as it seeks to bolster capital ahead of new international standards and focus on core clients. The U.S. lender has also agreed to sell its Canadian credit-card unit, First Republic Bank and holdings in BlackRock Inc.

To contact the reporters on this story: Donal Griffin in New York at dgriffin10@bloomberg.net; Jody Shenn in New York at jshenn@bloomberg.net

To contact the editor responsible for this story: David Scheer at dscheer@bloomberg.net

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