Bank of America Mortgage Woes Continue

The issue is like asbestos or smoking, says one analyst.
By Dan Freed ,

NEW YORK (

TheStreet

) --

Bank of America

(BAC) - Get Report

's exposure to lawsuits over its mortgage securitization practices continues to worry analysts and investors who follow the bank.

Potentially hundreds of billions worth of mortgage bonds packaged and sold by Bank of America and other institutions are expected to face challenges from large investors sitting on losses related to the bonds. The investors, which include

Fannie Mae

(FNMA.OB)

,

Freddie Mac

(FMCC.OB)

,

BlackRock

(BLK) - Get Report

,

Pacific Investment Management Co.

, monoline and private insurers, among others, are trying to put back the mortgages to the banks, arguing they are invalid due to documentation or other technical issues.

Richard Bove, analyst at Rochdale Securities, believes the issue will continue for the next four to five years.

"It's going to be like a tobacco or an asbestos situation," Bove says, arguing court battles will continue evolving for some time at plaintiffs test courts to find successful strategies and Bank of America and other institutions work to find off the evolving challenges.

Moody's Investors Service added to the chorus of concern with a report it published Monday on a recent legal case that has been in the news, "Kemp v Countrywide Home Loans." Bank of America acquired Countrywide in 2008, and many of the difficulties it faces are related to home loans Countrywide originated.

According to the Moody's note, the Kemp case pertains to a May 2008 bankruptcy filing in which Bank of America/Countrywide, acting as a mortgage servicer, tried to foreclose on a mortgage for which

Bank of New York Mellon

(BK) - Get Report

was the trustee.

Testimony by a Bank of America mortgage servicing employee and statements and a local Bank of America indicate that the mortgage note in question was not properly delivered to the securitization trustee, Moody's states, arguing "the case will encourage other mortgage borrowers as well as investors in Countrywide securitizations to challenge BofA."

Bank of America spokesman Jerry Dubrowski says the Bank of America servicing employee's testimony "was mistaken." He added, "she was asked to testify about the authenticity of the loan documents and not to serve as an expert on the post-closing document deliveries and practices, and during the hearing those questions started to come her way and she misspoke and she tried later to say she was unwilling to make these broad statements, but what got picked up predominantly was that this was the practice of Countrywide, and it's not," he says.

Though Moody's report states that "it appears the case was concluded without all of the relevant facts," it still argues that "operational flaws in supervising and lawyering foreclosures and bankruptcies also pose an issue for BofA and other servicers."

Dubrowski says Bank of America has faced $26.7 billion in repurchase requests through the third quarter of 2010, and has "resolved, declined or rescinded" $18 billion of those claims. It has established a reserve fund against the remaining $8.7 billion which at the end of the third quarter was $4.4 billion. And Dubrowski points out that there is also collateral back those loans, even if they should ultimately be put back to Bank of America.

"They're not worth 100 cents on the dollar, and I'm not telling you they are, but they're also not worth zero," Dubrowski says.

Of course what remains to be seen is how much more may be coming.

A report from Compass Point Research and Trading argues Bank of America has the largest exposure to putbacks, estimating it will eventually lose more than $35 billion on such securities.

JPMorgan Chase

(JPM) - Get Report

is second on Compass's list, with $23.9 billion in estimated losses.

Citigroup

(C) - Get Report

is just eighth on the list with an estimated $7.8 billion hit.

Wells Fargo

(WFC) - Get Report

, despite being of the nation's largest three mortgage lenders along with Bank of America and JPMorgan, isn't even in the top 11, according to Compass Point's loss estimates.

But while the issue is clearly a serious issue for Bank of America, Luna Analytics analyst Carole Berger argues the bank's losses will ultimately prove "not as large as the fear mongers would have you believe."

Bank of America's Dubrowski questions the methodology of reports that put a loss estimate on mortgage putbacks for Bank of America and other banks.

"We have access to all of the loan information in all of these loan files because we were either the originator or Countrywide was the originator and to date we haven't been to provide you with what would be the total exposure to the company," he says. "When you consider the third party estimates, you have to ask yourself: they have a fraction of the information we have and yet they seem all too willing to provide an estimate as to the exposure. They make a series of assumptions to get there. We're not able to do that."

--

Written by Dan Freed in New York

.

Disclosure: TheStreet's editorial policy prohibits staff editors, reporters and analysts from holding positions in any individual stocks.

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