Bank of America Faced with $5 Billion in Mortgage Buy-Back Requests

by 23 Apr 2012
( -- Requests to repurchase mortgage loans originated by Bank of America are accumulating, despite a good performance by the financial institution in the first quarter. Trading operations at Bank of America are strong, particularly in bonds and swaps of currencies and financial securities tied to interest rates. There is a $5 billion downside to this first quarter performance, however, as mortgage investors are demanding that the bank take back bad home loans.

Private investors, as well as government-sponsored mortgage giants Fannie Mae and Freddie Mac, are after Bank of America to buy back hundreds of thousands of deficient home loans sold to them prior to the bursting of the American housing bubble. The grand total of these claims amounts to $16 billion. Bank of America is having a hard time dealing with the numerous claims. The bank has always lived by the principle of putting up a strong defense against mortgage repurchase claims, but their sheer number and the pace at which they are accumulating makes it difficult. Bank of America has had reasonable success in their fight, however, as many of the claims were successfully staved off last year.

The claims from Fannie and Freddie amount to about $2 billion. Many of the recent claims that Bank of America is now dealing with date back to 2006, and many of them come from private investors. These private claims present a greater challenge to Bank of America than those of Fannie and Freddie, since they are less likely to be amicable settled. The repurchase problem faced by Bank of America stems in part from its acquisition of Countrywide Financial, the troubled subprime mortgage lender that was at one point a major lender in the United States during the housing bonanza of the early 21st century. Bank of America purchased Countrywide back in January of 2008, just a few months before the global financial crisis and the subprime mortgage meltdown unraveled. Aside from fighting off the claims and offering to settle, there is not much else that Bank of America can do to ameliorate this situation.

The bank cannot repackage these loans and sell them to other investors without other parties coming forward with objections. Bank of America's financial performance may be deeply affected in the future if it starts losing these claims, or if it is forced to increase the pace of settlements.


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