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Bank of America

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executives have spent a lot of time in the past few months talking about the numbers $7 billion to $10 billion in the context of the all-important question known as "mortgage putback risk."

Given the confusing array of mortgage-related risk around Bank of America, investors could be forgiven for thinking of $7 billion to $10 billion as a "worst case" number. It comes up often in Bank of America conference calls these days, as analysts try to answer the critical question of how much worse the bank's mortgage headaches could turn out to be.

Bank of America CEO Brian Moynihan

However, Bank of America's ongoing exposure could turn out to be far greater than that--a fact that was highlighted on the company's first quarter earnings call with analysts Friday.

First, a refresher on what mortgage putbacks--or repurchases-- are. The issue relates to mortgage loans that were pooled together and stuffed into bonds known as mortgage backed securities (MBS) ahead of the financial crisis.

The buyers of those MBS, mainly large institutional money managers like insurance companies and pension funds, have in many instances lost a great deal of money on their investments. Many of them are taking issue with the way those MBS were put together, arguing that the mortgages that were put into those MBS were fraudulent or in some way did not meet the criteria originally promised.

As a result, they have sicced their lawyers on the banks. While the exposure is expected to be costly for many large institutions, including

JPMorgan Chase

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Wells Fargo

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Bank of America

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is widely thought to have the most risk, at least in terms of overall dollars.

The risk broadly falls into two buckets. One bucket is repurchases from government sponsored enterprises (GSEs)

Fannie Mae



Freddie Mac


, which guaranteed a big chunk of the MBS before the crisis, and today are virtually the only guarantors.

Bank of America announced a large settlement with Fannie and Freddie last quarter, which, while it led to a fourth quarter charge of $4 billion dollars, appeared to give investors some relief.

But anyone who thought that settlement took the GSEs out of the picture got an ugly surprise in this quarter: the Freddie Mac settlement encompasses existing and future claims, but the Fannie Mae settlement covers only existing claims.

What's more, the Freddie Mac settlement only covers mortgages underwritten by Countrywide, which Bank of America acquired in 2008. There are other mortgages underwritten by Bank of America that both GSEs are still trying to get Bank of America to buy back.

So much for the GSE issue being resolved.

Nomura analyst Glenn Schorr highlighted his concern in a question during the call to outgoing CFO Chuck Noski

"I think following the partial settlement with the GSEs, I and others might have thought with $5 billion plus in reserves, we might see a leveling off on the provision, but another billion with over half going to the GSEs, I'm assuming that's for the Fannie stuff that wasn't settled, and just curious on how you think about that as a, you know, an annoying run rate that's with us for a few more quarters or you feel like what percent of the pipe are you through now on the GSEs?" Schorr asked

Noski's answer? About 75% through.

So that's the first bucket of mortgage repurchase risk. Not finished, despite the big fourth quarter settlement. About 75% done, according to Noski.

The second bucket of risk refers to so-called "private label" MBS. This is MBS that isn't guaranteed by the GSEs.

This is where the much-discussed $7 billion to $10 billion number comes in.

Those figures don't refer to total potential private label exposure, but rather to


capital that may need to be set aside. Since Bank of America has already put aside $5.4 billion, add another possible $7 billion to $10 billion to that and you have a total exposure that could be as much as $12.4 billion to $15.4 billion in the private label bucket.

Or it could be more if home prices continue to fall. Though Bank of America set aside $1 billion against ongoing GSE claims and a settlement with monoline bond insurer

Assured Guarantee

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, it did not reduce its estimate of up to $10 billion in additional exposure--a fact that puzzled Morgan Stanley analyst Betsy Gracek.

"You would expect with the settlement and the additional accruals that 7 to 10 would go down and that is largely offset by

housing market deterioration," Noski explained.

The $1 billion provision also surprised Sandler O'Neill analyst Jeff Harte, who had a "buy" on Bank of America and expected just a $150 million provision. So far, at least, Harte is still recommending the shares, which were down 1.6% early Friday afternoon.

To be sure, much of the increased capital Bank of America is setting aside may eventually never be used. Just because claims are being filed doesn't mean Bank of America will have to buy the mortgages back, and even if it does, the mortgages themselves could recover.

Still, as long as those reserves keep climbing, it is likely Bank of America's share price will keep falling as it did on Friday.


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.