Bank of America Buybacks Still a Risk: Moody's

NEW YORK (TheStreet) -- Moody's warned Bank of America (BAC) debt investors on Monday that risk remains over mortgage-repurchase costs, even though the bank has settled buyback issues with Fannie Mae (FNMA.OB) and Freddie Mac (FMCC.OB).

Moody's points out that Bank of America still faces uncertain costs for buybacks from private investors as well as monoline insurers. The Charlotte, N.C.-based bank settled with Fannie and Freddie last week for roughly $3 billion, but hasn't outlined the potential risk for other claims, because much hinges on the outcome of various court cases.

"We expect the cost to resolve those claims will be less than the total cost incurred for GSE claims, and as such is manageable for BofA," Moody's analyst David Fanger says in a report Monday. "However, there is a risk that the costs may be substantially higher if unfavorable legal decisions are reached, although we believe it will likely take several years for the litigation to be resolved."

Combined with the $6.3 billion worth of Fannie-Freddie buybacks that Bank of America had previously incurred, it has now bought back nearly $10 billion worth of mortgages sold to government-sponsored enterprises (GSEs). Moody's expects that number to ultimately climb to $12 billion.

It also expects the total cost for private and monoline buybacks to be "significantly less" than GSE repurchases. The ratings group notes that while default rates and loss-severity on those riskier mortgages are much higher, the monolines and private investors face many more "procedural hurdles" than the GSEs in pushing banks to buy back souring loans.

Moody's believes the repurchase claims will end up locked in litigation, adding to the uncertainty over expense. Any kind of unfavorable legal decision could bolster claimants' position against Bank of America and, "in that situation, BofA's repurchase costs could be significantly larger," Moody's warns.

-- Written by Lauren Tara LaCapra in New York.



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