Reporting from New York — Several major investment firms are moving to force Bank of America Corp. to buy back bad mortgages that were issued by Countrywide before the lender was acquired by the financial giant.
News of the effort by mortgage-bond investors — including Pimco of Newport Beach, TCW Corp. of Los Angeles and BlackRock Inc. of New York — came Tuesday after BofA posted a $7.3-billion third-quarter loss.
The loss, amounting to 77 cents a share, stemmed from the company's decision to slice $10.4 billion from the value on its books of its credit operation to reflect the expected effect of new federal regulations.
Without the write-down, the bank would have earned $3.1 billion, more than expected, thanks in part to an improvement in the finances of consumers who owe BofA money. The number of BofA customers more than 90 days late on a payment, for example, fell 10% from the second quarter.
"The credit quality continues to improve across the board," Chief Executive Brian Moynihan told analysts during a conference call.
Bank of America's shares, however, sank 54 cents, or 4.4%, to $11.80, with most of that decline coming late in the trading day after Bloomberg News identified the big-name bondholders challenging the company over home loans backing a pool of mortgages originally valued at more than $100 billion.
The bondholders sent a letter Monday in a first step toward demanding "the repurchase of loans that were originated in violation of underwriting guidelines," according to a statement issued by a law firm representing the bondholders.
The investors include the Federal Reserve Bank of New York because of securities it holds as a result of Fed-backed bailouts early in the financial crisis.
During the earnings call, Moynihan compared the bondholders to "people who come back and say, 'I bought … a Chevy Vega, but I want it to be a Mercedes.'" He added, "We will go in and fight this."
Moynihan said he didn't know how big such claims against BofA might be.
Christopher Whalen, a bank analyst at Institutional Risk Analytics, said the issue could become a significant problem for BofA but added that it wasn't clear how things would shake out.
"They are sort of hiding behind the fact that they don't know," he said. "They are putting the best face on it that they can."
Bank investor David Ellison played down the ultimate effect.
"My sense is that this is a problem, but it's solvable," he said.
Meanwhile, Bank of America sought Tuesday to minimize separate problems over the validity of foreclosure filings related to mortgages it services and in many cases owns.
BofA was one of the first banks to halt foreclosure sales because of such legal issues. On Monday, the company said that its foreclosure process had not been as flawed as feared and that it would begin refiling paperwork next week and resuming foreclosures soon afterward.
Moynihan said Tuesday that he thought the issue had been blown out of proportion.
"We don't see the issues that people were worried about, quite frankly, but we're taking this very seriously," Moynihan said.
The third-quarter net loss that the bank reported Tuesday compared with a loss of $1 billion, or 26 cents, a year earlier.
The huge write-down in the latest quarter was intended to account for a decline in revenue from fees that merchants pay on debit-card transactions. The financial regulatory overhaul enacted last summer authorized the government to impose a cap on those fees.
Even with the one-time loss, Bank of America executives said they are hopeful about their ability to make up revenues that are lost as a result of financial reform elsewhere in their operations.
Other companies with large credit-card and debit-card operations, such as JPMorgan Chase & Co. and Citigroup, have not taken such big write-downs.
"From all the predictions of what banks stand to lose, we never get to this much," said Adil Moussa, an analyst at Aite Group, a consulting firm in the financial industry.