B of A beefs up rep and warrant reserves ahead of mortgage settlement

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Bank of America set aside $100 million in its reserves for representation and warranty claims ahead of a pending settlement to resolve legacy mortgage issues.

B of A has approximately $2 billion in reserves set aside for various rep and warrant claims and the additional $100 million is part of $200 million of new reserves added during the third quarter.

The "reps and warranty provision…was the result of advanced negotiations with certain counterparties to resolve several outstanding legacy issues," Chief Financial Officer Paul Donofrio said Friday during a conference call with analysts.

Donofrio declined to specify the entity B of A is negotiating the settlement with. But his wording suggests the settlement is being negotiated with another mortgage market participant, rather than a regulator, and likely involves loans and mortgage-backed securities from the Countrywide business B of A acquired in 2008.

Mortgage activities in Bank of America's consumer banking division reported income of $142 million during the third quarter, down 52% from a year ago primarily due to lower loan production income and a drop in the valuation of its mortgage servicing rights.

B of A originated nearly $13.2 billion in first mortgages during the quarter, down 22% from a year ago. About 80% of first mortgage originations will be held on balance sheet, continuing a strategy of holding onto most of its loan production.

The value of B of A's MSR portfolio was $2.41 million, down from $2.48 million a year ago. Donofrio noted that the MSR value benefited from $300 million in net hedging results.

Core mortgage operations, combined with the reps and warrants reserves and other costs from B of A's legacy mortgage activities, resulted in a $20 million loss during the third quarter, compared to consolidated mortgage banking income of $589 a year ago.

Overall, Bank of America reported net income of $5.6 billion off net revenue of $21.8 billion during the third quarter.

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