Big bank asked to repurchase billions of dollars in home loans
By Alistair Barr, MarketWatch
SAN FRANCISCO (MarketWatch) — Bank of America Corp. has been hounded for months by demands to repurchase billions of dollars in home loans backing mortgage securities. On Tuesday, the Federal Reserve Bank of New York emerged as one of the sources of this pressure.
The New York Fed is part of an investor group that owns more than 25% of the voting rights in over $47 billion of residential mortgage-backed securities issued by Countrywide Financial, the home loan giant that Bank of America /quotes/comstock/13*!bac/quotes/nls/bac (BAC 11.30, -0.50, -4.24%) acquired in 2008.
On Monday, the group wrote to Countrywide Home Loan Servicing and Bank of New York Mellon Corp. /quotes/comstock/13*!bk/quotes/nls/bk (BK 25.91, -0.08, -0.31%) , the trustee of the mortgage securities, saying they haven’t been serving the loans backing the securities properly.
Bank of America losses widen
The investors asked Bank of New York to demand the repurchase of loans that were originated “in violation of underwriting guidelines,” according to a statement Monday by Kathy Patrick of law firm Gibbs & Bruns, which is representing the group.
The seller of any “ineligible or predatory” mortgages should also pay the cost of modifying them for homeowners, or buy those loans back from the pools of collateral backing the securities, she added.
“Ours is a large, determined, and cohesive group of bondholders.” Patrick said. “We have a clearly defined strategy. We plan to vigorously pursue this initiative to enforce Holders’ rights.”
Bank of America shares fell 4.4% to close at $11.80. Earlier in the day, Bank of America reported a big quarterly net loss. See story on the lender's results.
For Bank of America, this is the latest source of pressure on the banking giant to repurchase loans backing mortgage securities.
Fannie Mae /quotes/comstock/11k!fnma (FNMA 0.41, -0.01, -2.17%) and Freddie Mac /quotes/comstock/11k!fmcc (FMCC 0.42, -.00, -0.07%) , the government-owned mortgage giants, are demanding that some home loans be bought back by originators.
Bond insurers MBIA Inc. /quotes/comstock/13*!mbi/quotes/nls/mbi (MBI 12.52, +0.38, +3.13%) and Ambac Financial /quotes/comstock/13*!abk/quotes/nls/abk (ABK 1.07, -0.07, -5.97%) are pursuing similar strategies. Read about this new problem for the largest U.S. banks.
If Bank of America is forced to buy back troubled loans from mortgage securities, it will have to pay 100 cents on the dollar. That could leave it with billions of dollars in losses.
AIG bail out
The New York Fed ended up owning Countrywide mortgage securities through the government bailout of insurer American International Group /quotes/comstock/13*!aig/quotes/nls/aig (AIG 41.33, +0.32, +0.78%) .
When AIG faced a cash crunch in 2008, the New York Fed set up a special purpose vehicle known as Maiden Lane II that bought residential mortgage-backed securities from AIG life insurance companies.
The New York Fed lent $19.5 billion to Maiden Lane II for the purchases in November 2008. At the end of June, this loan stood at $14.7 billion.
Other investors in the group including BlackRock Inc. /quotes/comstock/13*!blk/quotes/nls/blk (BLK 172.44, -2.19, -1.25%) , MetLife Inc. /quotes/comstock/13*!met/quotes/nls/met (MET 39.88, -0.05, -0.13%) and Pimco, the world’s largest bond fund manager owned by Germany’s Allianz /quotes/comstock/23z!alv (XE:ALV 88.90, +0.04, +0.05%) , according to Bloomberg News. Spokesman at those three companies declined to comment.
Bank of America’s exposure
Bank of America Chief Financial Officer Chuck Noski gave a detailed presentation on the company’s potential exposure to loan repurchases during a conference call with analysts on Tuesday.
Noski referred to the letter from the group of investors that includes the New York Fed.
“While we continue to review and assess the letter and have a number of questions about its content including whether these investors actually have standing to bring these claims, we continue to believe the servicer is in compliance with its servicing obligations,” Noski said, according to a transcript of the call.
The 115 mortgage-backed security deals mentioned in the letter have an original principal balance of $104 billion and a current balance of $46 billion, he noted.
”Overall, where we have concluded that a valid basis for repurchase does not exist, we think it is important for investors to know that we will vigorously contest such claims and defend the interest of Bank of America shareholders,” Noski added.
From 2004 to 2008, Bank of America and Countrywide sold $1.2 trillion of home loans to government mortgage agencies like Fannie and Freddie. Through September, the bank got about $14 billion of repurchase claims from that group of loans, Noski said.
Bank of America has resolved $11.4 billion of those claims and eaten net losses of roughly $2.5 billion in the process, the CFO reported.
Bank of America has reserved appropriately for any future repurchase claims from these mortgage agencies, he added.
Bank of America and Countrywide sold $160 billion of loans through mortgage-backed securities that were guaranteed by bond insurers. Through September, the bank got $4.8 billion of repurchase claims. The bank has bought back $550 million of these loans and $4.2 billion remains outstanding, Noski said.
Between 2004 and 2008, Bank of America and Countrywide sold roughly $750 billion of home loans in other deals that were bought by other investors and weren’t guaranteed by bond insurers. About 40% of these loans have been paid off so far.
Through September, Bank of America got about $3.9 billion of repurchase claims related to this group of loans. The company has resolved almost $2.9 billion of those claims, Noski said.
“Until we have a meaningful repurchase experience with these counterparties, we believe is it not possible to reasonably estimate this exposure,” Noski added.
Alistair Barr is a reporter for MarketWatch in San Francisco.
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