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BofA swings to profit; mortgages cast long shadow

Associated Press Modified: July 18, 2012 at 2:15 pm •  Published: July 18, 2012

Bank of America can't shake its mortgage headache.

In a reminder that the consequences from the financial crisis are far from over, the bank said Wednesday that investor disputes over bad mortgages and mortgage-backed bonds have more than doubled from a year ago.

The bank beat Wall Street's profit expectations for April through June, and executives emphasized that the bank is setting aside less money for bad loans overall, a sign that more customers are paying back loans on time.

But the growing investor claims suggest the mortgage problem, which has already cost the bank more than $13 billion, is growing.

"It's certainly a lot of bad news," said Guy Cecala, CEO and publisher of the trade publication Inside Mortgage Finance. "The mortgage banking business of most major banks now is turning into a big profit center."

The claims are from investors who bought mortgages or mortgage-backed bonds from Bank of America before the 2008 crisis. Investors have claimed that Bank of America and other banks misled them about the quality of the mortgages.

The banks have been forced to buy back some of those mortgages after investors threatened to sue.

The bank swung to a $2.1 billion profit after it slashed jobs and other expenses. In last year's second quarter, the bank lost $9.1 billion, largely because it had to pay $8.5 billion to settle claims from mortgage investors.

The stock rose briefly before the market opened, but was down for most of the day. With an hour of trading to go, it was down 35 cents, or 4.4 percent, at $7.57.

Outstanding claims from mortgage investors jumped to nearly $23 billion from $10 billion a year ago, led partly by new claims from Fannie Mae, the government-sponsored mortgage lender.

Bank executives said they believe many of the new claims from Fannie Mae are not valid. Fannie Mae's standards for submitting claims "continue to be inconsistent with their own past conduct and our interpretation of our contractual obligations," the bank said in a presentation for analysts.

Bruce Thompson, the chief financial officer, said the bank expects the outstanding claims to grow. The process for resolving them, he said, "continues to evolve, and does remain unclear."

Bank of America, based in Charlotte, N.C., became a major player in the mortgage market in 2008, after it bought California mortgage lender Countrywide Financial.

But Countrywide, known for making exotic mortgages, has drawn regulatory fines and made the bank a target for angry homeowners. Bank of America's mortgage unit has not turned an annual profit since 2007.

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