Bank of America Sees Mortgage Claims Skyrocket (Update 1)

Bank of America mortgage story updated with additional details throughout.

NEW YORK ( TheStreet) -- Bank of America ( BAC) saw a 73% rise in new mortgage-related claims in the second quarter as new claims from private investors rose to$8.6 billion from $4.9 billion in the first quarter.

Overall new mortgage claims were $8.21 billion, compared to $4.8 billion in each of the last two quarters and $3.8 billion in the second and third quarters of 2011.

Disputes over mortgage-related securities have been a severe drag on bank earnings for nearly two years, though Bank of America has been the hardest hit by far. Most of the trouble has come from its Countrywide Financial unit. Bank of America bought Countrywide in 2008.

During a tense conference call Wednesday during which time Bank of America shares moved steadily lower despite a rising market, CFO Bruce Thompson appeared unsuccessful at allaying analyst concerns. Thompson said the increase was "primarily due to claims we received from trustees that we fully anticipated at time of the Bank of New York Mellon Corp. ( BK) settlement a year ago and were largely reflected in the increase in reserves at that time."

Thompson was referring to a proposed $8.5 billion settlement between Bank of America and several large institutions, including Goldman Sachs ( GS), BlackRock ( BLK) PIMCO and the Federal Reserve Bank of New York, among others. The settlement has been opposed by several parties including the New York State attorney general.

In addition to the rise in claims from private investors and institutions, disputes from government sponsored enterprises (GSEs) Freddie Mac ( FMCC)and Fannie Mae ( FNMA) rose by $2.9 billion.

Bank of America now has $22.7 billion in outstanding claims over mortgage-related disputes, up from $16.1 billion at the end of the first quarter.

Citing the tougher tactics by the GSEs and still-unresolved private litigation, FBR Capital Markets analyst Paul Miller raised his mortgage-related loss estimates to $53 billion from $42 billion in a research note published June 22.

Bank of America also reached a $375 million settlement with Syncora Holdings, a monoline bond insurer, which included an agreement by Bank of America to repurchase several mortgage securities. Bank of America CFO Thompson said the settlement, which was announced late Tuesday by Syncora, will reduce outstanding claims from monoline insurers by 20%.

Analysts appeared to have a tough time drawing conclusions from the Syncora settlement about Bank of America's overall exposure to mortgage disputes. Oppenheimer analyst Chris Kotowski, for example, extrapolated from the $375 million number provided by Syncora in a press release and Thompson's 20% number that Bank of America had paid out 60 cents on the dollar on Syncora's claims.

Thompson told Kotowski to "be careful" with his calculations, saying the settlement figure was "not anywhere near what you just quoted." He then attempted to explain why he took issue with Kotowski's calculation, after which point Kotowski said, "Not sure I understood that, but I'll follow up. Thank you."

The exchange was just one of several between analysts and Thompson on the Bank of America call that related to mortgage repurchase concerns, suggesting that despite Bank of America's assurances, the issue is far from resolved. Bank of America shares, which were initially higher following the 7 a.m. earnings announcement, moved steadily lower during the call, which started at 8:30. The shares opened roughly flat at 9:30, and moved lower throughout the call. By the time the call concluded, shortly after 10 a.m., Bank of America shares were down roughly 1.45% The S&P 500, meanwhile, moved higher during the same time frame.

Following the earnings release, Nomura Securities analyst Glenn Schorr maintained his "neutral" rating on Bank of America, arguing that Bank of America's low valuation means "shares can hang in there on these results, but the stock is likely range bound until better earnings power shows through and mortgage concerns fade."

-- Written by Dan Freed in New York.

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