Bank of America Corp. (BAC:US)’s second- quarter results were marred by record claims for refunds on faulty mortgages, casting doubt on whether improvements in the lender’s real estate operations will last.
A cut in reserves for bad loans helped the Charlotte, North Carolina-based company swing to a $2.46 billion profit (BAC:US) from a record $8.83 billion loss a year earlier as the bank reported today that fewer borrowers fell behind on payments. At the same time, the bank said demands for buybacks from mortgage-bond investors and insurers surged more than $6 billion in three months to $22.7 billion.
“We don’t think this is done,” said Paul Miller, an analyst at FBR Capital Markets and a former Federal Reserve Bank of Philadelphia examiner with a hold rating (BAC:US) on Bank of America. “Can they defend themselves and pay only a fraction of that,” Miller asked, or will claims “continue to come in and just overwhelm the company?”
Analysts repeatedly questioned top managers including Chief Executive Officer Brian T. Moynihan during a conference call today about the demands, including the extent of future losses and why claims continue to rise on loans made as long as six years ago during the housing bubble. Moynihan, 52, has already committed more than $40 billion to resolve disputes on faulty loans and foreclosures.
Bank of America, ranked second by assets among U.S. banks, gave up gains during early trading (BAC:US), falling 4.9 percent to $7.53 at 4 p.m. in New York for the day’s worst showing in the Dow Jones Industrial Average. It’s still leading the 30-company benchmark for the year with a 35 percent advance.
Lenders typically have sold mortgages to investors with a promise to buy them back if underwriting flaws were found. Insurance companies that backed mortgages got similar assurances, and some have won settlements. The bank agreed to resolve a dispute with Syncora Holdings Ltd. for $375 million, the Bermuda-based insurer said yesterday.
While the quarter’s newest claims totaled in the billions, the firm added just $395 million to reserves that cover any payments that may result. Shareholders (BAC:US) have pressured Bank of America to stop the bleeding as private investors and U.S.- backed firms such as Fannie Mae comb through holdings for flaws that merit a refund.
Sue or Settle
“We clearly have a disagreement, and the way that it gets resolved is obviously through one of two ways,” Chief Financial Officer Bruce R. Thompson said during the conference call. “Either they would look to bring an action, or alternatively there would be a settlement.”
Outstanding claims from private investors jumped 77 percent to $8.6 billion, mostly from trustees of mortgage-bond pools that weren’t included in an $8.5 billion settlement (BAC:US) announced last year, Bank of America said. The $22.7 billion of pending claims doesn’t include $3.1 billion from investors who Bank of America said don’t have legal standing to force investigations.
Bank of America had anticipated a rise in claims from private investors and built repurchase reserves a year earlier, Thompson said. Ultimate losses from that group will be “well below $1 billion,” he said.
Requests from Fannie Mae and Freddie Mac, the so-called government-sponsored enterprises, rose 35 percent to almost $11 billion. Bank of America said that most of the new claims are on loans in which borrowers have made at least two years of payments, indicating the lender wasn’t at fault.
Fannie Mae is stepping up pressure on Bank of America and other lenders as it seeks to defray costs for taxpayers who bailed out the Washington-based company in 2008. PNC Financial Services Group Inc. said today the GSEs are “aggressively” boosting demands and that it’s possible the Pittsburgh-based firm could see another $350 million in buyback requests.
Bank of America’s total $1.77 billion provision for credit losses declined from $3.26 billion a year earlier and was the smallest since 2007. Companywide revenue fell 1.4 percent to $22 billion from the first quarter, reflecting lower contributions across most of the firm’s operations (BAC:US). The tally jumped from $13.2 billion a year earlier, when it was depressed by one-time costs of cleaning up defective mortgages.
Excluding one-time items, earnings per share for the quarter would have been close to break-even, according to an analysis by Ed Najarian at International Strategy and Investment Group LLC. Najarian has a hold rating on the shares.
Under Moynihan’s predecessor Kenneth D. Lewis, the company ballooned to become the biggest U.S. bank through more than $130 billion in takeovers (BAC:US). One of them was Countrywide Financial Corp., the mortgage lender that was careening toward collapse in 2008. Regulators and lawmakers have cited Countrywide for lax standards that contributed to record U.S. defaults, and claims tied to its loans fueled Bank of America’s record loss in last year’s second quarter. The real estate unit’s quarterly loss narrowed to $768 million from $14.5 billion.
Bank of America ranked as the biggest U.S. home lender after buying Countrywide, with almost a quarter of the market. It’s now No. 4 with a 4.2 percent share as of March 31, according to trade journal Inside Mortgage Finance, leaving Wells Fargo & Co. and JPMorgan Chase & Co. (JPM:US) to benefit from a refinancing boom amid record-low interest rates. Bank of America said today it had reclaimed some of the lost market share.
Moynihan has vowed to bring down expenses, and in March he promised “demonstrable progress” every quarter, with more than 30,000 retail and support jobs targeted for elimination. The CEO today announced $3 billion of cuts at the investment bank, trading and wealth-management units.
Expenses excluding interest dropped to $17 billion from $19.1 billion in the first quarter and $22.9 billion in the second quarter of 2011, with the staff shrinking (BAC:US) by 3,228 from the end of March to 275,460 full-time workers, according to the statement.
The lender also reduced long-term debt by $53 billion to $302 billion in the quarter, helping reduce interest costs.
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