BofA Hopes Latest Mortgage-Security Loss Estimate Is on the Mark

Posted on Monday, July 4, 2011

NEW YORK—Bank of America Corp. this week said it had finally fenced off its losses from the now-toxic, mortgage-bond deals.
However, it is not the first time the bank has claimed to have the losses penned in.
The nation's biggest bank by assets confirmed Wednesday it was paying a high-profile group of institutional investors $8.5 billion to repurchase securities, and that it was setting aside another $5.5 billion to handle other claims. The investors had argued that the mortgages backing their securities, mostly stemming from the bank's Countrywide Financial Services unit, had been improperly underwritten, and they were demanding that the bank buy back those that had gone sour.
For the remaining securitized loans it sold to private investors—amounting to nearly $540 billion—the bank says it might need $5 billion on top of the $14 billion it set aside.
After previous attempts by the bank to stake the boundaries missed the mark, some are wondering if this time is any different.
Bank of America has made "progress" in addressing its mortgage-buyback losses, Barclays analyst Jason Goldberg acknowledged in a note. But "while the company aimed to box its remaining exposure, this feat has proved elusive in the past," he said.
Getting a handle on the losses is critical for the bank; some analysts estimated losses could reach more than$50 billion. To counter such worries about possible extreme losses, the bank has given out a series of estimates.
The bank argues the new estimate comes with more knowledge and experience and therefore should carry more weight. Also, Wednesday's settlement was based on the loans created by Countrywide Financial before Bank of America bought it. Since Countrywide loans performed worse, the remaining amount should be cheaper to settle.
"We think we have done our best job to estimate," said Bank of America spokesman Jerry Dubrowski. "It is quite complicated and it is a moving target and as long as there is volatility in housing prices it will be moving."
Bernstein analysts called the $5 billion figure "reasonable," and shareholders sent shares up nearly 3% Wednesday.
Thursday, some of the joy was gone. Shares fell 1.6% and the bank closed the second quarter as the period's worst performer in the Dow Jones Industrial Average.
Morgan Stanley analyst Betsy Graseck estimated the remaining losses for private-label deals would hit $6.3 billion, 26% above the bank's estimate.
Previously, the fence Bank of America drew around its mortgage losses kept growing in circumference. Consider its prior statements involving government-sponsored enterprise claims that it repurchase mortgages:
—January 2011: The bank announced a $3 billion settlement with Fannie Mae and Freddie Mac that addressed its remaining exposure to their repurchase demands. "These actions resolve substantial legacy issues," Chief Executive Brian Moynihan said.
—April: Repurchase claims from GSEs constitute slightly more than half of a new $1 billion provision to handle repurchase. Executives blame changing GSE tactics and falling home prices.
—June 29: Bruce Thompson, incoming chief financial officer: New claims may hit still earnings for another three years, and their "variability going forward will be based on any changes in the behavior as well as home prices," he said.
For the mortgage securities sold to private investors, estimates have proven even flimsier:
—January 2011: Executives said a preliminary estimate "suggests a possible upper range of loss that could be up to $7 billion to $10 billion over existing accruals."
—May: The bank the disclosed that the range of $7 billion to $10 billion didn't include $4 billion owned by investors who the bank assumed would not be able to make a legal demand for repurchase.
—June 29: The bank took the position that $14 billion had been the estimate for losses, even as the two provisions and the estimate of potential future losses added up to $19 billion.
Still, some believe the worst is over, and even if the estimate turns out to be low, they were happy for more clarity.
Anthony Michael Sabino, a lawyer and professor at St. John's University's business school, said the settlement was being viewed as a step in the right direction, and Mr. Moynihan appeared committed to cleaning up the problems.
Greg Donaldson, of Donaldson Capital Management, a manager of $450 million in assets and Bank of America shareholder, said it appeared Bank of America was finally willing to get "naked."
"We are taking our clothes off, and we are going to have a press conference and say here is the way it really is," Mr. Donaldson said he felt the bank was saying. "It starts to give you an idea of their confidence on the assets."

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