Bloomberg News

Moynihan Opts to ‘Rip Off Band-Aid’ From BofA Loan Wound

June 29, 2011

(Updates shares starting in the fifth paragraph.)

June 29 (Bloomberg) -- Bank of America Corp. is settling for a bigger loss on defective mortgages than Chief Executive Officer Brian T. Moynihan had forecast in January as he seeks to distance the firm from housing bets and reverse a stock decline.

The bank agreed to pay $8.5 billion to resolve claims from bondholders, including BlackRock Inc. and Pacific Investment Management Co., involving soured mortgages. The Charlotte, North Carolina-based lender said today the bill for settling with private investors may eventually exceed $14 billion, compared with a projection five months ago of zero to an “upper range” of $7 billion to $10 billion.

“We support management’s attempt to rip off the Band-Aid and get the mortgage mess behind them so investors can look forward, but unfortunately there remain many open issues and likely billions more in costs,” David Trone, an analyst at JMP Securities, said today in a note. Moynihan took a “much higher- than-expected hit” to resolve some claims, he said.

Moynihan, 51, is resolving mortgage disputes as he focuses on his goal of restoring the largest U.S. bank into a “growth company.” The lender has been unprofitable in three of the six quarters since Moynihan took the post at the start of 2010, including the company’s projection of a loss of as much as $9.1 billion for the period ending tomorrow.

Bank of America declined 19 percent this year through yesterday on the New York Stock Exchange on concern mortgage- related costs, new international capital rules and a slowing U.S. economy will swamp earnings. The shares rose 32 cents, or 3 percent, to $11.14 at 4:15 p.m. in New York Stock Exchange composite trading.

‘Favorable Development’

The settlement will benefit the bank and may contribute to an upgrade of one of its financial strength ratings, Moody’s Investors Service said. Fitch Ratings called the accord a “favorable development.”

The agreement covers loans with an original balance of $424 billion, or about half of the bank’s so-called private-label deals, the company said. The accord excludes loans sold to Fannie Mae and Freddie Mac, the government-owned mortgage firms. It also doesn’t cover securities and fraud claims, and is limited to loans initiated by Countrywide Financial Corp., which the bank acquired in 2008.

Moynihan said last year he’d engage in “hand-to-hand combat” fighting demands that the bank repurchase bad loans.

“We did fight,” Moynihan said today. “The cost expense and uncertainty are taken off the table for half the private- label claims, but we fought” views on costs that were higher than the bank’s, he said.

$14 Billion

Bank of America disclosed $14 billion in fresh costs today -- the $8.5 billion settlement and an additional $5.5 billion for reserves for future loan-repurchase demands -- and said that losses beyond that may be as much as $5 billion.

The deal follows a $3 billion settlement announced in January to resolve some claims from Fannie Mae and Freddie Mac. Assuming stable housing prices, the deal “largely addressed” those liabilities, the bank said then, and Moynihan told investors management was “pleased to put the GSEs behind us.”

Three months later, unresolved demands for loan refunds surged $2.9 billion to a record $13.6 billion, fueled mostly by claims from Fannie Mae and Freddie Mac, known as government- sponsored enterprises.

“Every time they’ve given us a number, they revise it upward 90 days later to be worse,” said Tony Plath, a professor of finance at the University of North Carolina in Charlotte who follows Bank of America. “Investors will realize this is just one more in a series of losses that the bank underestimated.”

‘Best Estimate’

Chief Financial Officer Bruce Thompson, pressed on a conference call to explain why the projections are rising, cited uncertainty around U.S. home prices and said they were management’s “best estimate at this point.”

Home prices fell 4 percent in April from a year earlier, the biggest drop since November 2009, according to the S&P/Case- Shiller index of property values in 20 U.S. cities. Sales of new houses fell about 2.1 percent in May, the first decrease in three months, the Commerce Department said June 23.

Bank of America is recording $6.4 billion in additional mortgage-related costs in the second quarter, including a $2.6 billion goodwill impairment at its real estate unit. The sum also accounts for litigation costs and fees tied to the failure of its mortgage-servicing business to meet deadlines for foreclosing on homes for Fannie Mae and Freddie Mac.

Late Fees

The inability to meet timelines cost the firm more than $1 billion in the six months ended March 31, Bank of America said last month. The tally will rise as the two U.S.-owned mortgage firms become more “aggressive” with servicers, the company previously said.

Moynihan is seeking to boost results from commercial lending, wealth management and investment banking and limit damage from home loans originated before he became CEO. He named Terry Laughlin in February as head of a new unit managing foreclosures and soured loans.

The settlement, which also includes changes in how Bank of America services loans, won support from 22 investors, including the BlackRock group represented by Gibbs & Bruns LLP, the law firm said today in a statement. Bank of New York Mellon Corp., as the trustee for the mortgage-bond deals, will direct the flow of settlement payments.

The accord may encourage other investors to seek relief from Bank of America, Standard & Poor’s said. JMP’s Trone said the agreement could increase costs for mortgage disputes at rival banks including JPMorgan Chase & Co. and Citigroup Inc.

MBIA, Allstate

Bond insurer MBIA Inc., in suing Bank of America and Countrywide over $21 billion of mortgage securities in New York State Supreme Court, said its reviews had found that 91 percent of defaulted or delinquent loans had “material discrepancies from underwriting guidelines,” such as borrower incomes, credit scores or debt-to-income ratios.

MBIA jumped 11 percent to $8.61 in New York trading on speculation Moynihan is more likely to settle with the company. Allstate Corp., which said in a lawsuit last year that the bank’s Countrywide unit misrepresented $700 million in residential mortgage-backed securities, climbed 2.6 percent.

Moynihan’s settlement with other bondholders “confirms the validity of investor claims and shows that Bank of America- Countrywide is acknowledging their responsibility in the RMBS crisis,” said Maryellen Thielen, a spokeswoman for Northbrook, Illinois-based Allstate, in an e-mailed statement today.

Countrywide was “one of the dumbest acquisitions ever, it really was,” said Paul Miller, a former examiner for the Federal Reserve Bank of Philadelphia and analyst with FBR Capital Markets in Arlington, Virginia. Bank of America managers are “getting a lot of curve balls thrown at them and they’re doing the best job trying to hit them.”

--With assistance from Brooke Sutherland and Noah Buhayar in New York. Editors: Dan Kraut, Dan Reichl

To contact the reporters on this story: Hugh Son in New York at; Dawn Kopecki in New York at

To contact the editor responsible for this story: David Scheer at

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