The Single Biggest Threat to Bank of America Corp (BAC) Today

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This is the first in a series of five articles covering Bank of America Corp (NYSE:BAC)‘s legal problems since the financial crisis. Check back throughout the week as we publish the rest of the series.

If Bank of America Corp (NYSE:BAC) faced death by supernova during the financial crisis, in the years since, it’s been battling death by a thousand cuts. Though we’re now five years past the darkest days of the downturn, the executives at B of A remain profoundly ensconced in it thanks to a seemingly endless barrage of lawsuits stemming from the ill-fated acquisition of Countrywide Financial in 2008.

Bank of America Corp (NYSE:BAC)Although this may sound like hyperbole, the manner in which these lawsuits play out will dictate not only when B of A fully emerges from the proverbial fog of war, but even if it completely emerges at all. Tens of billions of dollars in legal liability from these suits could still bring the lender to its knees.

What follows is the first of five articles providing an in-depth analysis of not only B of A’s legal victories, which are many, but more importantly, the threats that lie ahead for the nation’s second largest lender by assets.

Appreciating the scale of B of A’s legal liabilities
B of A’s purchase of Countrywide will go down in history as one of the worst, if not the worst, corporate acquisitions of all time. In the four years leading up to the financial crisis, Countrywide underwrote a staggering $1.562 trillion in residential mortgages. Those mortgages were then sold to government-sponsored agencies Fannie Mae or Freddie Mac or packaged into mortgage-backed securities and peddled to institutional investors like university endowments, public pension funds, and insurance companies. A full $301 billion of these loans have since either gone into default or are severely delinquent — that is, more than 180 days past due — and investors are now looking to B of A to make them whole.

Given the scale and multitude of legal claims brought against B of A, it’s understandably hard to appreciate the progress the bank has made versus the challenges that remain. To this end, I’ve found it helpful to break the analysis down into three different buckets:

1). Lawsuits and settlements related to the servicing of mortgages.

2). Settlements related to the sale of whole mortgages to government-sponsored agencies Fannie Mae and Freddie Mac.

3). Lawsuits related to the sale of mortgage-backed securities to institutional investors.

You can see this breakdown in the following infographic — the green houses represent settled claims, and the red houses show estimates of liability remaining.


Sources: Court documents, media reports, and Bank of America’s annual and quarterly filings.

In terms of progress, the best news so far has come from the mortgage-servicing issues (the first bucket). In February of last year, the bank joined four other mortgage servicers — JPMorgan Chase & Co. (NYSE:JPM)Citigroup Inc. (NYSE:C)Wells Fargo & Company (NYSE:WFC), and Ally Financial Inc (NYSE:GMA) — in a landmark settlement with the U.S. Justice Department and 49 state attorneys general. The deal called for a total of $25 billion in cash and other relief to borrowers, with B of A’s share weighing in at a whopping $11.82 billion.

Then, in January of this year, B of A joined with nine other mortgage servicers to settle similar claims brought by the Federal Reserve and the Office of the Comptroller of the Currency. Taken together, while expensive, these agreements effectively put the mortgage-servicing component of B of A’s liability to rest.

B of A has also addressed the lion’s share of its liability stemming from the sale of mortgages to Fannie Mae and Freddie Mac (the second bucket). Between 2004 and 2008, Countrywide sold a total of $846 billion in mortgages, or 54% of its aggregate origination volume, to these institutions. By the end of last September, a full $71 billion of the mortgages were in default, and $40 billion were severely delinquent.

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