Bank of America Stands Alone in Mortgage Mess

Story updated to include comments from Oppenheimer analyst Chris Kotowski, statements from Goldman Sachs filing and Tuesday's stock price decline.

NEW YORK ( TheStreet) -- Bank of America ( BAC) is well-known to mortgage-industry watchers as the most vulnerable of the big lenders to so-called "put-backs," but the market appears to be still catching on to the extent to which the bank distinguishes itself in this dubious category.

Bank of America shares, which have underperformed big bank peers for months, took another hammering again on Tuesday, falling 1.69% to close at $12.23, their lowest close since Dec. 8, while most other big financials were higher on the day.

"Everybody has this knee-jerk reaction that, when they're worried about housing, they're just going to sell all the banks, and that might have been appropriate two years ago when everybody had all the subprime paper, but if you look at the exposures now, BofA is in a class by itself," says Oppenheimer & Co. analyst Chris Kotowski.

For those who need a refresher, put-backs -- or repurchases -- relate 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 such as 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.

In November, when the issue of "put-back risk" was front and center in the media and with investors, shares not only of Bank of America but of other big and even medium-sized mortgage lenders were being battered daily due to the threat of untold billions in potential exposure.

A widely followed report at the time from Compass Point Research and Trading, featured prominently in Barron's, put the total risk to banks at $134 billion.

Since then, banks have spent a great deal of time walking investors through the risks of put-backs, and they are widely believed to have been overestimated. The latest scorecard comes from Nomura Securities, which in a research report on Monday drawn mostly from company financial filings, states that Bank of America is "in an unfortunate league of its own" when it comes to put-back claims.

Indeed, as the above chart demonstrates, Bank of America's $13.6 billion in put-back claims compares with less than $9 billion at JPMorgan Chase ( JPM), Wells Fargo ( WFC) Citigroup ( C), Capital One Financial ( COF), First Horizon National Corp. ( FHN) and SunTrust Banks ( STI) combined.

Also noteworthy is that while the claims against the other banks appear to be stabilizing or dropping, Bank of America saw a rise of nearly $3 billion in the first quarter alone.

In an email exchange, Bank of America spokesman Jerry Dubrowski noted that most of the rise comes from claims by Fannie Mae ( FNMA.OB) and Freddie Mac ( FMCC.OB). Indeed, claims by those government sponsored enterprises (GSEs) rose to $5.4 billion at the end of the first quarter from $2.8 billion at the end of 2010.

Bank of America settled many of those claims and has taken additional reserves against future GSE claims.

"We believe that our remaining exposure to representations and warranties for loans sold directly to the GSEs have been accounted for as a result of the recent agreements and the related adjustments to the reserve," Dubrowski wrote. (Representations and warranties is another term for put-backs or repurchases.)

Still, Bank of America has warned it may have to increase reserves by as much as $7 billion to $10 billion for claims by private (non-GSE) institutions, including monoline insurers like MBIA ( MBI) or money managers like BlackRock ( BLK) which bought MBS stuffed with mortgages that were fraudulent or weren't what Bank of America originally said they were.

That $7 billion to $10 billion number effectively grew in the first quarter, however, because it is the same number Bank of America had given in the fourth quarter and the bank did not adjust it downward even though it announced a more than $1 billion settlement with Assured Guarantee ( AGO), another monoline insurer. Bank of America outgoing CFO Chuck Noski told analysts the bank's "worst case" for additional reserves had effectively increased due to ongoing weakness in the housing market.

Why is Bank of America such an outlier? Much of the answer appears to be its acquisition of Countrywide Financial in 2008.

"Countrywide was a pure market-share focused company. So when all were doing something stupid, Countrywide was doing the worst to gain share," wrote Tom Brown, head of financial services-focused hedge fund Second Curve Capital.

Indeed, Countrywide appears to have ramped up its mortgage operation just as the housing market was at its frothiest. Countrywide was the top U.S. mortgage originator with $463 billion in 2006, followed by Wells Fargo at $398 billion, with JPMorgan Chase a distant third at $173 billion, according to data from trade publication Inside Mortgage Finance that Countrywide cited in its 2007 10-K.

In 2007, however, Wells Fargo cut its originations way back to $272 billion. That was still good for second place, but well behind Countrywide's $408 billion in originations. Also worth noting is that Bank of America's own mortgage unit, which wasn't among the top five originators in 2006, showed up at No. 4 in 2007 with $190 billion in originations. Add that to the $408 billion from Countrywide and you get nearly $600 billion in mortgages originated in the last year of the housing bubble.

This story may be far from over. Bank of America executives have said they expect the disputes to drag on for years.

And there may still be surprises from other banks. Christopher Whalen, co-founder of research firm Institutional Risk Analytics, believes both Bank of America and Wells Fargo are understating their exposures. He points to the more than $100 billion in losses at Fannie Mae and Freddie Mac in 2009 and 2010 and finds it hard to square with the roughly $23 billion between Bank of America and the other six banks in the Nomura report.

"On the GSE side, my sense is that the government, and this is (Treasury Secretary) Tim Geithner have already made the decision to absorb most of the losses, and the reason for this is complicated, but they essentially know that if they got really aggressive it would force Bank of America and probably Wells into a restructuring," Whalen argues.

Also, the Compass Point report argued that some of the largest exposure may be with investment banks such as Goldman Sachs ( GS) or banks based outside the U.S. such as Deutsche Bank ( DB).

In its year-end filing, Goldman stated that "outstanding repurchase claims were not material," as of December 2010, and while the filing acknowledged "potential for increasing claims for repurchases," it added that "the firm is not in a position to make a meaningful estimate of that exposure at this time." A spokesman declined to elaborate.

Spokespeople for Deutsche Bank did not respond to questions about potential putback exposure at those companies.

-- 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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