BofA Claim Surge Said to Include Non-Countrywide Loans

Bank of America Corp.’s surging claims for refunds on faulty mortgages in the second quarter stemmed partly from loans made by the bank and its Merrill Lynch unit, in addition to the company’s Countrywide subsidiary, said two people with direct knowledge of the matter.

The backlog of new claims from private investors probably will increase in the months ahead, according to the people, who asked for anonymity because mortgage disputes are private. The firm regards grounds for the demands as weaker than those triggered by Countrywide loans, the people said.

Bank of America said last month that total demands for buybacks from mortgage-bond investors and insurers surged more than 40 percent in three months to $22.7 billion. The Charlotte, North Carolina-based company, ranked second by assets among U.S. lenders, has already committed more than $40 billion to resolve disputes on faulty loans and foreclosures, and shareholders are pressing the bank to stem the bleeding.

“Whether it’s private investors or the government, folks are going to scour every delinquent loan to try and find defects,” said Jefferson Harralson, an analyst at KBW Inc. with a market perform rating on the lender. “Countrywide loans were dealt with first, but the non-Countrywide loans still have a significant chance of being put back to them.”

Progress has been made in talks to break an impasse over refunds with Fannie Mae (FNMA), which accounted for the bulk of previous claims, the people said. A settlement isn’t close and may not happen, and the company is comfortable with its reserve levels, they said. The lender has climbed 29 percent this year in New York trading, compared with a 58 percent decline in 2011.

Wider Scope

Of about $11 billion in requests from government-sponsored enterprises as of June 30, $10.1 billion were from Fannie, said a person with direct knowledge of the figures. About 70 percent of claims from the Washington-based mortgage firm were for loans in which borrowers made at least two years of payments, indicating the bank probably isn’t at fault, the person said.

The newest claims from private investors expand the focus to loans made by the main bank division and Merrill Lynch, which have attracted relatively little attention in past cases. Most repurchase demands are attributed to Countrywide, whose lax standards and subprime loans were blamed by lawmakers and regulators for fueling the housing bubble and subsequent financial crisis.

Outstanding claims from private investors jumped 77 percent to $8.6 billion in the second quarter, mostly from trustees of mortgage-bond pools that weren’t included in an $8.5 billion settlement announced last year, Bank of America said last month.

Investor Concern

Claims reflect the unpaid principal balance. Actual losses are typically reduced to a fraction of the demands after the bank proves some claims are invalid, negotiates settlements on others and seizes collateral. Bank of America settled for about 2 percent of total claims in the $8.5 billion accord. Jerry Dubrowski, a Bank of America spokesman, declined to comment.

Analysts repeatedly questioned Chief Executive Officer Brian T. Moynihan, 52, during the bank’s quarterly conference call about the demands, including the extent of future losses and why claims continue to rise on loans made as long as six years ago during the housing bubble. Bank of America had become the biggest home lender after the 2008 purchase of Countrywide, whose specialties included subprime loans.

Lenders typically have sold mortgages to investors with a promise to buy them back if underwriting flaws were found. Insurance companies that backed mortgages got similar assurances, and some have won settlements from banks as defaults swelled.

Bank of America has been anticipating a rise in claims from private investors and building repurchase reserves, Chief Financial Officer Bruce Thompson has said. Ultimate losses from that group will be “well below $1 billion,” he said.

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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