More Shameful Behavior by Bank of America

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Just in case you still respected or trusted Bank of America (NYSE: BAC  ) after learning that it reordered debit transactions in a manner that jacked up overdraft fees, the company has given you more reason to change your view. This case involves private investors that bought toxic mortgages that were sold as, well, not toxic.

In B of A's most recent quarterly Securities and Exchange Commission filing, the bank stated it reduced estimated losses it expects from mortgage repurchases by a whopping $4 billion. Its rationale: There are significant legal hurdles faced by private investors trying to access loan files and sue for damages. In other words, B of A plans to make it too difficult and/or too expensive for small investors to get what's only fair.

B of A has earmarked $7 billion to $10 billion to settle claims over its toxic mortgages. That's over and above the billions it already spent settling similar claims with Fannie Mae, Freddie Mac, Assured Guaranty (NYSE: AGO  ) , and Ally Financial.

Not so fast ...
Thankfully, B of A's shameful plan may be easier said than done. Though the bank had hoped to fight mortgage repurchase demands loan by loan, recent court rulings allow parties suing banks over toxic mortgages to use a sampling of loans. That makes it easier and less expensive to sue. B of A itself has acknowledged that if this approach is upheld more generally, it could increase the number of private investors who sue to recover their losses.

Of course, if private buyers of B of A's toxic mortgages recover some of that $4 billion after all, that would reduce the bank's profits -- likely hurting stockholders.

Foolish takeaway
If you own bank stocks, there's earnings risk related to lawsuits over toxic mortgages (among other things). Bank of America may not have set aside enough assets to cover the cost of repurchasing toxic mortgages, which could cause a hit to earnings. Other banks with significant exposure to residential mortgages include Citigroup (NYSE: C  ) , JPMorgan Chase (NYSE: JPM  ) , Wells Fargo (NYSE: WFC  ) , SunTrust Banks (NYSE: STI  ) , and First Horizon National (NYSE: FHN  ) . 

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Fool contributor Cindy Johnson does not currently own shares of any stock in this story. No way. The Motley Fool owns shares of JPMorgan Chase and Wells Fargo. The Fool owns shares of and has opened a short position on Bank of America. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

Read/Post Comments (3) | Recommend This Article (4)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On June 06, 2011, at 4:47 PM, Smars52 wrote:

    I still don't get why its BAC's fault a bunch of stupid investors bought their assets. It is their job to do their own research.

    And why are we still talking about put-backs old news!!!!

  • Report this Comment On June 06, 2011, at 5:23 PM, j18a21g wrote:

    Obama does not get it and neither does The Fool.

    We have to stop beating up on the banks over and over again and again on the same old issues. WE CAN NOT grow this economy or get employment back on track without a strong financial system. The Fool bringing up this old info. and degrading the banks over and over is just delaying our recovery, and Obama's massive regulation of the banks is sure to slow the recovery.

  • Report this Comment On June 06, 2011, at 5:29 PM, Smars52 wrote:

    I don't know if its delaying the recovery

    Its more just like having a 2 year old control one of the mediums for business discourse.

    come to

    for grown up talk

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