Outstanding claims rose 28 percent in the first quarter from $12.6 billion in the last three months of 2011, the Charlotte, North Carolina-based bank told investors yesterday. At the same time, the company set aside less than $300 million to cover repurchases for a third straight quarter, helping the mortgage unit post a narrower first-quarter loss.

“You’ll see those numbers pile up, and they won’t reserve for them,” said Paul Miller, an analyst at FBR Capital Markets with a “hold” rating on Bank of America. “Ultimately, my guess is that Fannie Mae takes Bank of America to court. If they lose that lawsuit, where does that leave them on reserves?”

At stake for Chief Executive Officer Brian T. Moynihan is the ability to limit further losses after the firm booked more than $42 billion in costs tied to defective loans. Buyers and insurers of mortgage securities have demanded that the lender compensate them for shoddy loans created by Countrywide Financial Corp., acquired by Bank of America in 2008.

The dispute revolves around mortgages created by the bank and Countrywide and sold to investors with a promise to buy them back if data on borrowers, their income or the property later turned out to be false. The increase in demands for buybacks was driven by Fannie Mae and private investors who refused to participate in an $8.5 billion settlement last year.

Fannie Mae

Fannie Mae, seeking to defray its U.S. bailout, stepped up pressure last year by saying that Bank of America must repurchase loans if a mortgage insurer drops coverage included in the original sale. Bank of America refused, and in January Fannie Mae cut the company off for funding new loans.

Almost 90 percent of the $4.7 billion in fresh claims were for loans from 2007 or earlier, before the worst of the housing crunch and economic slump. Bank of America Chief Financial Officer Bruce R. Thompson has said this shows outside factors such as the recession were to blame, not bad underwriting, because borrowers kept up with payments for years before defaulting.

“We obviously continue to have a disagreement with them about whose responsibility those are,” Thompson said during conference calls yesterday. “The sustainability of what we are accruing is appropriate given what we think we owe.”

Miller, a former examiner for the Federal Reserve Bank of Philadelphia, said he hadn’t heard another large bank use that argument as a reason to reject repurchase demands.

What’s Excluded

The $16.1 billion in claims doesn’t include $3.1 billion in demands from investors who Bank of America says don’t have standing to force loan investigations, the firm said. That’s an increase of more than 80 percent from the previous quarter.

Separately, the bank reclassified $1.85 billion of home- equity loans as non-performers, even if the borrowers were still paying on time, in response to new regulatory guidance on how to treat junior liens when first mortgages are overdue. Bank of America, with the largest home-equity portfolio among U.S. lenders, said the sum was already covered by reserves.

Regulators have been concerned that banks were overvaluing such loans because the delinquent first mortgages often signal an impending default on the second lien. The result is typically a total loss for the bank holding the junior loan.

Bank of America’s real estate unit posted a $1.15 billion first-quarter loss, narrowing from $2.4 billion a year earlier as the company allowed its reserve for repurchases to dwindle. The provision to cover buyback demands dropped to $282 million from $1 billion a year earlier.

Cutting Originations

Moynihan, 52, has slashed mortgage-lending operations to reduce assets considered risky by regulators, while shifting resources to service overdue loans. Bank of America saw its share of originations drop to 5.6 percent in the fourth quarter from 10 percent in 2011’s third quarter and 25 percent in 2007, according to a February note from FBR Capital Markets.

The CEO told analysts he will focus on selling home loans to customers of the bank while cutting purchases of loans from outside correspondent providers to zero. Among the targeted customers, “we underperformed, but we’re doing exactly what we wanted, which is to focus on direct-to-retail,” Moynihan said. “You’ll see us improve there.”

-- Editors: Rick Green, David Scheer

To contact the reporter on this story: Hugh Son in New York at hson1@bloomberg.net

To contact the editors responsible for this story: David Scheer at dscheer@bloomberg.net; Rick Green at rgreen18@bloomberg.net

http://www.bloomberg.com/news/2012-04-19/bank-of-america-beats-analyst-estimates-as-trading-jumps.html

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