Funds News

UPDATE 1-BofA says to fight mortgage bond investors

* BofA says no basis for charge it sold bad mortgages

* Investors’ notice gives bank 60 days to fix issues (Adds comment from Bank of America, details)

NEW YORK, Oct 19 (Reuters) - A group of large investors has accused Bank of America Corp BAC.N of mishandling mortgages packaged into bonds, but the bank said on Tuesday it would fight being held responsible for investors' losses that could reach the billions.

The investors said that some mortgages that the bank packaged into bonds should never have been sold to investors in the first place. The group controls about $16.5 billion of bonds, and a person familiar with the matter said the Federal Reserve Bank is among the investors. Bloomberg reported that the group also includes asset managers Pimco and BlackRock Inc.BLK.N

A foreclosure crisis erupted in recent weeks because of bad paperwork on repossessed homes, but it has highlighted other risks to banks in the mortgage market. One such risk is mortgage investors forcing banks to buy back billions of dollars of bad home loans at their face value.

On a conference call with analysts, Bank of America said that there are many investors who have no basis for claiming that the bank sold them bad mortgages.

“If you think about people who come back and say, ‘I bought a Chevy Vega, but I want it to be a Mercedes with a 12-cylinder,’ we’re not putting up with that,” Bank of America Chief Executive Brian Moynihan said on the call.

But the bank also said it does not know how big its total potential mortgage losses are, which spooked investors, sending Bank of America’s shares down 3.32 percent to $11.93.

As the mortgage market sustains its fourth year of weakness, which saw nearly 3 million home foreclosures since January 2007, investors are working hard to minimize their losses.

Fannie Mae and Freddie Mac, which guarantee mortgages and were nationalized by the U.S. government, have been forcing banks to buy back billions of dollars of loans.

Bank of America, the largest U.S. bank, said it believes it its reserves are sufficient for claims from Fannie Mae and Freddie Mac, but it is not certain how much it may face in claims from other kinds of investors.

The group of investors has issued a “notice of nonperformance” to Countrywide Home Loan Servicing, now part of Bank of America. The unit works on behalf of mortgage bond holders to collect payments on mortgages and work out bad loans.

The notice gives the Bank of America unit 60 days to fix the issues in question. After a cure period, the investors can sue the bank. Spokesmen for PIMCO, BlackRock and the New York Fed declined to comment.

“It’s a question of buying a Vega and getting a Vega,” Kathy Patrick, a partner at Gibbs & Bruns, told CNBC. Patrick represents the group of investors.

Dan Frahm, spokesman for Bank of America Home Loans told Reuters, “We believe we’ve complied with our obligations.” He declined to comment further.


The process of reviewing claims with private investors and with bond insurers that backed packages of the loans has been more complex than the claims process with Fannie and Freddie, Bank of America’s Chief Financial Officer Chuck Noski told analysts on a call reviewing third-quarter earnings.

“It’s all over the map,” said Noski.

Some of the bond insurers and other private investors that bought up mortgage packages are engaged in litigation with the bank which is further complicating and slowing down the claims process.

“The process is constipated,” Noski said, in a separate interview with Reuters later on Thursday. “If we review and repurchase (from the bond insurers) we’re fine. When we say no, they stop engaging.”

“We’re going to make sure that we’ll pay when due but not just do a settlement to move the matter behind us,” Bank of America’s Chief Executive Brian Moynihan told analysts on a call.

The bank put aside $873 million in the third quarter against repurchase claims, slightly less than the $1.2 billion it put aside in the second quarter. Its total cushion against claims in these issues was $4.4 billion at the end of September.

A report by JPMorgan analysts on Tuesday estimated U.S. banks broadly could be forced to repurchase up to $120 billion of mortgages from third-party investors over five years. [ID:nN18290980]

Worries over banks’ repurchase costs have spiked in recent weeks in tandem with allegations banks’ foreclosure processes have been fault.

Bank of America, which has been reviewing foreclosure documents, on Monday said it would partially lift a nationwide foreclosure halt that began Oct. 9. [ID:nN18274195]

The New York Fed in August said it was involved in “multiple efforts” to force repurchases of ineligible loans contained in securities held in its Maiden Lane portfolio.

The New York Fed acquired the mortgage debt as part of the rescue of American International Group and the fire-sale of Bear Stearns to JPMorgan Chase during the financial crisis. (Reporting by Elinor Comlay and Al Yoon, Editing by Jackie Frank)