Bank of America in a League of Its Own with MBS Mess
Although it is well known to people familiar with the mortgage industry, many others may not realize the true extent of Bank of America’s vulnerability to the repurchases or “put backs”, according to Investment News. These put backs or repurchases relate to mortgage loans that were pooled together and structured into bonds known as mortgage backed securities (MBS) which were marketed and sold to investors prior to the financial crisis of 2008. Many individual investors and institutional investors alike have lost massive sums of money on these investments, which ended up being far more volatile and risky than originally promised.
Last November, the shares of Bank of America and other large and medium sized mortgage lenders were being hammered daily due to threats of the billions in exposure due to put backs. A report from Compass Point Research and Trading stated that the total risk was $134 billion, as featured in Barron’s. The latest report from Nomura Securities recently stated that “Bank of America was in an unfortunate league of its own” when it comes to put back claims. Their report demonstrated that Bank of America’s exposure was $13.6 billion, with less than $9 billion combined at JP Morgan, Wells Fargo, Citigroup, Capital One, First Horizon National and Sun Trust Banks. More importantly, it was noted that while the claims against other banks seems to be stabilizing or dropping, Bank of America had an increase of nearly $3 billion in the first quarter alone. Accordingly, Bank of America has warned that it may need to increase reserves by as much as $7 billion to $10 billion to cover claims. Simply put, it appears that the 2008 acquisition of Countrywide Financial by Bank of America has contributed mightily to their unequaled position regarding put backs.