In 2008, Bank of America bought Countrywide Financial, which was accused of predatory lending in making loans to people it knew did not meet proper underwriting standards. Government-sponsored entities like Fannie Mae and Freddie Mac, private investors, and bond insurers have made demands on Bank of America that securities backed by Countrywide-originated loans be repurchased, according to David Reilly’s Wall Street Journal article, “BofA Tones Down Mortgage Fight.” The number of outstanding mortgage repurchase claims against Bank of America is in excess of $12 billion, according to the article.
Bank of America recently estimated its potential liability for mortgage repurchase demands by private investors to be $7 to 10 billion (although it has not set aside any reserves to cover any of them), while some analysts estimate the number is closer to $15 billion, which is less than what some more pessimistic investors believe. While overall repurchase demands reportedly decreased in the third quarter, demands from bond insurers and private investors increased.
According to the article, Bank of America CEO Brian Moynihan can either try to put Bank of America mortgage problems behind it quickly, or litigate in hope of minimizing damages and spreading any payouts over a number of years.
Investors who bought mortgage securities backed by Countrywide-originated loans are considered likely to drive harder bargains. But agreeing to pay all the repurchase demands would result in only a 6% reduction in tangible book value, which the bank could withstand, and therefore may be the better course, according to the article.