Bank of America Friday morning reported a fourth quarter loss of $5 billion on its residential finance and insurance unit, citing $4.1 billion in representation and warranty costs tied to buybacks from Fannie Mae and Freddie Mac. In the year ago quarter its mortgage loss was $1 billion.

In 4Q10 it originated $85 billion of first mortgages, a $10 billion gain from 3Q10, but trailed market leader Wells Fargo & Co. by a stunning $43 billion.

For the full-year, the nation's largest servicer of home mortgages, lost $8.9 billion on its residential business, citing $6.8 billion of rep and warranty expenses. (Some of its losses are due to goodwill and impairment charges.)

BofA said that when the goodwill and impairment charges are factored out, the unit lost $3 billion in 4Q10. (A few weeks back it announced a $3 billion settlement on buybacks with the GSEs, but the agreement only covers repurchase claims that are currently being disputed and not new claims that might arise.)

But even more telling about its mortgage business – whose core is the old Countrywide Financial Corp. (CFC) franchise – is the massive revenue losses: $10.6 billion for all of 2010, compared to almost $17 billion the year before.

In early October BofA exited wholesale production, where it ranked fourth nationwide. However, it continues to rank first among all warehouse providers and (as of 3Q10 at least) was the largest correspondent buyer of mortgages in the U.S. outside of Fannie and Freddie.

The entire bank reported a net loss of $1.2 billion for the quarter.

During an earnings conference call with analysts, BofA pinned an upper bound to its risk of loss from litigation over private-label, mortgage-backed securities: $7 billion to $10 billion.That amount, announced along with the company's fourth-quarter results, does not represent what BofA expects it would have to pay to resolve such claims, the company's executives said.

Instead, it was produced in response to investor demands that it quantify the maximum exposure and the wide-ranging liability estimates that have recently been circulated by analysts. Some analysts believe the exposure could be much less than those numbers or even zero.

The company will not be setting aside reserves to cover that potential hit, CEO Brian Moynihan said, because the likelihood of being forced to pay those claims is too small to be considered "probable" and thus accounted for.

"As a reminder, there are significant procedural hurdles that parties would have to overcome before any of these amounts become probable," Moynihan said.

BofA's PLS exposure is, in large part, tied to CFC, which it bought in August 2008. CFC was a top ranked subprime lender and issuer of ABS.

Attorneys for investors that bought some of the CFC-issued ABS/MBS are trying to recoup their losses on the securities, which range in the billions of dollars

Subscribe Now

Access to a full range of industry content, analysis and expert commentary.

30-Day Free Trial

No credit card required. Access coverage of the securitization marketplace, including breaking news updated throughout the day.