Even Buffett Can’t Stop BofA’s Bleeding

08/31/2011 3:18 pm EST

Focus: STOCKS

Jim Jubak

Founder and Editor, JubakPicks.com

The sharks are no longer circling Bank of America (BAC). They’ve moved in with jaws wide open.

Who knew that the $4 billion acquisition of Countrywide Financial would keep adding fresh blood to the water—even now, three years after Bank of America acquired the mortgage lender in 2008?

Bank of America tried to stem the attack, first with a $5 billion investment from Warren Buffett, and then with today’s announcement that the bank would sell half its stake in China Construction Bank. That sale would raise $8.3 billion. About $3.5 billion of that would go to improve the bank’s Tier One capital position.

But neither move put off the mortgage sharks.

  • First, a proposed settlement of $8.5 billion between BofA and former Countrywide investors, which was brokered by Bank of New York-Mellon back in June, is threatening to come apart.

Beating yesterday’s deadline for objecting to the deal, the Federal Housing Finance Agency—which supervises Fannie Mae and Freddie Mac—has filed an objection to the deal. So has the Federal Deposit Insurance Corp., the attorney general for the state of New York, and several smaller investors.

The settlement was supposed to limit how much of the $424 billion in Countrywide mortgages packaged into mortgage-backed securities Bank of America would have to buy back from investors. If the deal comes apart, the bank’s liability would soar.

  • Second, the state of Nevada has started legal proceedings to invalidate the state’s 2008 agreement with the bank on mortgage loans made by Countrywide in the state.

The agreement was supposed to provide for lower mortgage rates for homeowners who needed to modify their mortgages to avoid foreclosure. Instead, the state has argued in its filing, the bank raised interest rates, proceeded with foreclosures even when loan modification requests were in processing, and failed to meet deadlines for responding to requests for mortgage modifications.

Countrywide originated 262,622 mortgages in Nevada. If the state succeeds in getting the agreement invalidated, it would then be able to sue Bank of America over its mortgage practices.

The Nevada agreement was part of an $8 billion, multi-state deal that required Bank of America to modify mortgages in exchange for a limit on its liability.

  • Third, US Bancorp (USB), the country’s sixth largest bank, sued Bank of America on Tuesday in its role as trustee for investors who bought into a pool of $1.75 billion in mortgages.

The suit alleges that Bank of America (for which, read: Countrywide Financial) failed to exercise reasonable due diligence in underwriting these mortgages. By June 2011, the suit states, 46% of the mortgages in the pool were in default or more than 60 days delinquent.

The suit demands that Bank of America buy back all the mortgages in the pool, because so many—66%, in one sample—breached Countrywide’s own stated underwriting rules.

The shares sold to Buffett and the sale of the stake in China Construction Bank were supposed to assure investors that Bank of America had the capital to meet its mortgage liabilities. But the liabilities threaten to overwhelm this new capital if these agreements to cap Bank of America’s liabilities come apart.

(And these three deals don’t end the bank’s problems. For example, American International Group has sued Bank of America for $10.5 billion.)

That $4 billion acquisition of Countrywide has cost Bank of America $30 billion in mortgage settlements. And counting.

Full disclosure: I don’t own shares of any stock mentioned in this post in my personal portfolio. The mutual fund I manage, Jubak Global Equity Fund, may or may not now own positions in any stock mentioned in this post. The fund did own shares of US Bancorp as of the end of June. For a full list of the stocks in the fund as of the end of June, see the fund’s portfolio here.

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