Wednesday, December 13, 2017
Business

Bank of America's refund backlog hits record high

Bank of America's backlog of pending demands for refunds on soured loans reached a record $16.1 billion as a dispute deepened between the second-largest U.S. lender and Fannie Mae.

Outstanding claims rose 28 percent in the first quarter from $12.6 billion in the last three months of 2011, the Charlotte, N.C., bank told investors this week. At the same time, the company set aside less than $300 million to cover repurchases for a third straight quarter, helping the mortgage unit post a narrower first-quarter loss.

"You'll see those numbers pile up, and they won't reserve for them," said Paul Miller, an analyst at FBR Capital Markets. "Ultimately, my guess is that Fannie Mae takes Bank of America to court. If they lose that lawsuit, where does that leave them on reserves?"

At stake for chief executive Brian Moynihan is the ability to limit further losses after the firm booked more than $42 billion in costs tied to defective loans. Buyers and insurers of mortgage securities have demanded that the lender compensate them for shoddy loans created by Countrywide Financial, acquired by Bank of America in 2008.

The dispute revolves around mortgages created by the bank and Countrywide and sold to investors with a promise to buy them back if data on borrowers, their income or the property later turned out to be false. The increase in demands for buybacks was driven by Fannie Mae and private investors who refused to participate in an $8.5 billion settlement last year.

Fannie Mae, seeking to defray its U.S. bailout, stepped up pressure last year by saying that Bank of America must repurchase loans if a mortgage insurer drops coverage included in the original sale. Bank of America refused, and in January, Fannie Mae cut the company off for funding new loans.

Almost 90 percent of the $4.7 billion in fresh claims were for loans from 2007 or earlier, before the worst of the housing crunch and economic slump. Bank of America chief financial officer Bruce R. Thompson has said this shows outside factors such as the recession were to blame, not bad underwriting, because borrowers kept up with payments for years before defaulting.

"We obviously continue to have a disagreement with them about whose responsibility those are," Thompson said Thursday. "The sustainability of what we are accruing is appropriate given what we think we owe."

Miller, a former examiner for the Federal Reserve Bank of Philadelphia, said he hadn't heard another large bank use that argument as a reason to reject repurchase demands.

The $16.1 billion in claims doesn't include $3.1 billion in demands from investors who Bank of America says don't have standing to force loan investigations, the firm said.

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