msnbc.com news services
updated 10/19/2010 5:08:36 PM ET 2010-10-19T21:08:36

The New York Federal Reserve wants its money back from Bank of America.

CNBC reported Tuesday that the New York Fed and money management firm PIMCO are part a consortium of eight large institutions suing Bank of America for failing to correctly handle loans that were packaged into bonds. Bloomberg earlier reported that the consortium is seeking to force the bank to buy back $47 billion of mortgage bonds.

Bank of America said it would fight the move.

"If you think about people who come back and say, 'I bought a Chevy Vega, but I want it to be a Mercedes with a 12-cylinder,' we're not putting up with that," Bank of America Chief Executive Brian Moynihan said on a conference call with analysts.

"We want to enforce the holders' contract rights," Kathy Patrick, the lead attorney representing the bond holders, told CNBC. "Today's action begins the clock ticking ... If these issues of non-performance are not addressed and cured, then our clients will be able to enforce their rights in court."

CNBC said the New York Fed has an interest in the mortgage securities through the Maiden Lane Partnerships that it set up in 2008 to manage transactions involving Bear Stearns and AIG.

The move ratchets up the pressure on the financial sector over faulty foreclosures. Stocks dropped broadly on worries that Bank of America would be forced to buy back mortgages, and the cost of insuring the bank's debt surged in the credit default swap market.

The lawsuit news came a day after Bank of America, the nation's largest bank, said it would resume foreclosure proceedings in some states, arguing that its procedures had been sound. Bank of America also posted a huge $7.65 quarterly loss Tuesday, mainly due to a charge related to credit and debit card reform legislation passed over the summer.

Bank of America shares have dropped more than 13 percent in the past several sessions since the bank announced a 50-state moratorium on foreclosures, which was scaled back Monday.

The consortium of investors suing Bank of America said that some mortgages should never have been included in the mortgage securities in the first place, and that Bank of America's  Countrywide Home Loan Servicing unit should force the original lenders to buy them back.

A "notice of nonperformance" filed by the investors gives the Bank of America unit 60 days to fix the issues in question. After a cure period, the investors can sue the bank. Spokesmen for PIMCO, BlackRock and the New York Fed declined to comment.

The salvo is the latest effort from investors to push losses from mortgage securities back onto banks that made the original loans. Investors say the loans did not meet the standards that bondholders were promised when they bought the securities.

The White House, which last week said it believe a nationwide foreclosure moratorium would harm the economy, warned banks Tuesday it would pursue them for any mortgage practices that violated the law.

Federal regulators are due to meet Wednesday to discuss the foreclosure crisis amid concerns it could impact the housing market and broader economy, White House spokesman Robert Gibbs said.

Attorneys general in 50 states last week launched a joint investigation into allegations that banks used shoddy and possibly fraudulent paperwork to evict delinquent borrowers from their homes.

Attendees at Wednesday's meeting will include Treasury Secretary Timothy Geithner, Housing and Urban Development Secretary Shaun Donovan and a top Justice Department official, Associate Attorney-General Thomas Perrelli, Gibbs said.

"Our concern has been ensuring the (foreclosure) process adequately complies with the law," he said.

Bank of America said Monday it plans to resume seizing more than 100,000 homes in 23 states next week. It said it has a legal right to foreclose despite accusations that documents used in the process were flawed.

Story: Housing starts up unexpectedly in September

"The basis for our foreclosure decisions is accurate," Dan Frahm, a Bank of America spokesman, said in announcing the bank's new approach.

Bank of America was the only lender to halt foreclosures in all 50 states. Other companies, including Ally Financial Inc.'s GMAC Mortgage unit, PNC Financial Services Inc. and JPMorgan Chase & Co., have halted tens of thousands of foreclosures after similar practices became public.

The controversy, which has drawn public outrage and sparked government probes, has raised new fears about threats to bank earnings and the health of the fragile housing market, which has been battered by falling prices and foreclosures of nearly 3 million homes since January 2007.

The Associated Press and Reuters contributed to this report.

Video: Forcing BAC to Buy Back Mortgages

Vote: What should be done about the foreclosure mess?

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