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, then sank all day. It closed down 39 cents, or 4.9 percent, at $7.53.
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.
The fact that many other lenders that churned out questionable mortgages are now out of business doesn't help Bank of America, said Cecala, from Inside Mortgage Finance.
"Bank of America is going to remain a big target," Cecala said, "because they're still around and they still have money."
Fannie Mae's new claims involve mortgages made in 2006 and 2007, according to the bank.
Nancy Bush, contributing editor at SNL Financial, said those mortgages are going bad because of economic problems – homeowners losing jobs or being under water on their mortgages – not because of how the bank wrote the mortgages.
"And Fannie and Freddie have every incentive to try to pin it on the underwriting bank," Bush said.
Brian Moynihan, Bank of America's CEO since the start of 2010, has taken a U-turn from his predecessors, slimming the bank rather than expanding its empire. It's now the country's second-biggest bank by assets, after ceding the top title to JPMorgan Chase.
It has about 275,000 employees, down more than 12,000 from a year ago. It would be down nearly 20,000 if it hadn't added workers to wade through all the troubled mortgages.
Analysts wonder how long cost-cutting can sustain the bank if revenue keeps slipping. Still, investors have rewarded Moynihan's efforts. The stock is up nearly 40 percent this year.
The second-quarter net income came to 19 cents per share. That beat the 16 cents expected by analysts polled by FactSet. Revenue was $22.2 billion, lower than analysts' expectations of $22.8 billion, and has declined steadily over the past year.
The bank emphasized how it set aside less money for bad loans: $1.8 billion for the quarter, down 46 percent from a year earlier and the lowest figure since the first quarter of 2007.
Total loans were down 5 percent. The investment banking unit brought in less in fees for underwriting and other services. Sales and trading revenue fell, which the bank blamed on investors' low appetite for risk. Net income rose in the wealth and investment management unit, and the bank added financial advisers.
In a note to clients, Nomura analyst Glenn Schorr noted the improving credit quality and cost cutting, but said they were being offset by the growing mortgage claims and low interest rates that crimp how much the bank can charge on its loans. He titled his note "Running in Place."
"We think shares can hang in there on these results," he wrote.