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Bank of America's Multibillion-Dollar Blunder

NEW YORK ( TheStreet) -- Reports that New York Attorney General Eric Schneiderman may challenge the recent $8.5 billion settlement by Bank of America (BAC - Get Report) of private-label mortgage putback claims for securitized loans inherited from Countrywide underscore what a disaster the 2008 acquisition has been for the nation's largest bank.

Under the reign of its acquisitive former CEO Ken Lewis, Bank of America completed its acquisition of Countrywide in July 2008, in an exchange of shares valued at $4.2 billion, although the real cost of the deal at that time included the cancellation of $2 billion Countrywide preferred shares, purchased by Bank of America in August 2007.
Former BofA CEO Ken Lewis' Countrywide deal is the gift that keeps on giving.

When the acquisition was completed, Countrywide's mortgages were written-down to fair value, by $9.8 billion, and its mortgage servicing rights were written-down by $1.5 billion. But those write-downs didn't address the eternal bleeding that Bank of America would suffer from a seemingly endless array of mortgage repurchase demands from investors.

After announcing a $2.8 billion settlement of mortgage representation and warranty claims on securitized Countrywide mortgages by government-sponsored enterprises Fannie Mae (FNMA) and Freddie Mac (FMCC) in December, Bank of America in June announced its $8.5 billion deal to settle institutional investors' mortgage putback claims on Countrywide's private-label paper.

So what has Ken Lewis's decision to hang the Countrywide albatross around Bank of America's neck really cost the company?

"Back-of-the-envelope, it is probably close to $25 billion," says FBR Capital Markets analyst Paul Miller, who adds "we don't know the expenses associated" with the servicing of the Countrywide mortgages.

Miller adds that most of the estimates are "rough estimates" ranging "between $25 and $30 billion," and that "it's probably going to grow."

As of March 31, Bank of America reported that the outstanding balance of remaining securitized Countrywide loans was $281 billion, with $85 billion past due six months or longer. Based on those numbers, the $8.5 billion settlement of "all" remaining Countrywide repurchase claims, was a rather small number, even with an "an additional $5.5 billion" set aside for additional repurchase claims in the second quarter. The company also estimated another $400 million for servicing obligations under the settlement.
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