Mortgage-Loan Packages Cited in B of A Loss

Bank of America said Monday that a recently reported $37-million operational loss was the estimated cost of settling with institutional investors over “faulty” mortgage-loan packages in which the bank acted as escrow agent.

In a statement responding to an inquiry by The Times, the bank had said last Friday that it had suspended several employees while investigating whether any acted “improperly” in connection with its loss.

A Bank of America executive here told The Times on Monday that two of the suspended employees are a vice president and a bank branch manager, both in Los Angeles.

Monday’s additional statement by Bank of America pinpointed for the first time the type of operation involved in the loss, although few details were provided.

“In 1982,” the statement from the bank’s San Francisco headquarters said, “the Bank of America began acting as escrow agent for pools of mortgage loans packaged by another company and used by that company as collateral for mortgage-backed certificates sold to institutional investors.

“The packages later proved to be faulty. As soon as this situation came to light, the bank created a task force to investigate the problem and resolve all potential problems with investors.”

The bank has contacted all the investors, it added, and “is making satisfactory agreements with them.”

Asked how the mortgage-loan packages were faulty, a Bank of America spokesman said that “problems with the documentation” were involved. He declined to elaborate or to identify the company for which the bank acted as escrow agent.

The spokesman, in response to a question, said he did not know if any government agencies are looking into the matter.

Two San Francisco securities analysts who follow Bank of America’s fortunes said Monday that they had not previously heard of its problem with the mortgage-backed securities.

Mortgage-backed securities in recent years have become a major method of forming large pools of investment capital. Banks, savings institutions and other lenders package their mortgages and, to raise pools of capital, sell certificates or “securities” backed by the mortgage packages to investors in the secondary market.

Bank of America’s estimated $37-million cost for settling with the investors in the mortgage packages was reported as a pretax “non-recurring” operational loss in the fourth quarter ended last Dec. 31. Last Monday, when the bank reported its fourth-quarter earnings, it did not explain the nature of the loss.

Monday’s statement said the bank does not expect to be in litigation with any of the investors who acquired the “faulty” securities packages.

Echoing last Friday’s statement, the bank said again Monday that the “several employees” suspended are on full pay while the institution reviews “all the circumstances that led to the situation to determine whether any bank employees acted improperly.”

It reiterated that the suspensions do not “imply any judgment by the bank as to any individual’s responsibility.”