When it comes to Bank of America (NYSE: BAC), a stark difference of opinion has emerged about the ultimate costs of the foreclosure mess. Branch Hill Capital, a hedge that is now shorting the bank, has suggested the nation's biggest consumer bank could be facing more than $70 billion in losses from mortgage securities, if it indeed has to take such securities back from Fannie Mae, Freddie Mac and others. Bond insurers, such as MBIA and Ambac, have seen their stocks soar, as bank stocks plummet. The insurers have not been shy about the prospects that banks will buy MBS that include lots of loans that "violate the representations and warranties banks made when selling mortgage-backed securities," notes CNBC. That would allow the insurers to escape a lot of payouts.   

Much more conservative estimates of losses have also emerged. FBR Capital Markets has estimated the controversy would cost the entire banking industry $6 billion to $10 billion. The rationale: a delay of one month will cost the banks $1,000 per home loan, so a three-month delay on roughly two million homes in foreclosure translates to $6 billion. Tack onto that about $3 billion to $4 billion to cover lawsuits stemming from faulty foreclosure procedures. The costs of litigation are hard to predict, of course. Some have sketched out some scenarios that would lead to massive costs and possibly stern legal action. 

The role of third-party due diligence firms has cropped back up in big way. Here's one view from the third-party due diligence industry. "By the time the meltdown was underway, investors had years of experience buying subprime loans and watching them default, and seeing the reasons for those defaults," writes the CEO of Alonhill. "It was no secret among investors that there were bad loans in these pools, or that issuers were paying for due diligence they had no right to see," he said. Regulators and investors may see it differently. I doubt that "c'mon, of course they knew" will hold up in court. 

Still, when it comes to the final legal liability, any guess work should always be taken with a grain of salt, but as the stock movements suggest, there is plenty to worry about. Bank of America and others have been trying to strike a reassuring note. The bank undertook an offensive to drive home its conviction that the loss estimates are overblown. It says foreclosures will delay fewer than 30,000 sales. It plans to rework 102,000 pending foreclosure affidavits in 23 states and stands by the accuracy of its procedures, according to Bloomberg. The bank has also expressed its view that all the worry about improper conveyances through the mortgage daisy chain are distorted as well. For now, the market isn't buying it. 

My guess is that banks will be adding to the litigation cost reserves at an even higher rate. - Jim