Bank of America, Corp will stop selling new mortgages to Fannie Mae as the result of a dispute over the way Fannie Mae is handling repurchases.  In November Bank of America said it would not cooperate with a new Fannie Mae policy that would require it to take back loans if an insurer dropped coverage.   The Bank of America and the government-controlled mortgage giant are in talks to resolve the dispute according to a Bloomberg source but the Bank will cut off the loan supply this month.

Bank of America told its investors last August that Fannie Mae's policies on private mortgage insurance cancellations or rejections might result in higher repurchase expenses for the Bank.  The numbers of companies that write this insurance have been dwindling.  One of the largest insurers, PMI Corporation, was seized by Arizona regulators last fall and their guidelines have been tightening.  According to Bloomberg the insurers have been voiding policies for errors including inflated appraisals or improperly documented borrower data.

Bank of America will continue to sell its loans to Freddie Mac, the other government sponsored enterprise, and Ginnie Mae and may keep, at least temporarily, some of the loans on its own balance sheet.

Bank of America has incurred what is estimated to be $42 million in expenses from loans it assumed when it took over the failing Countrywide Mortgage Corporation in 2008. The fallout from that take-over is continuing and the Bank of America is involved in many lawsuits over Countrywide's lending practices and the quality of loans those practices produced.  It was among the lenders participating in a $25 billion settlement with federal agencies and 49 of the states' attorneys general, and in a filing yesterday the Bank said it was "reasonably possible" that additional losses from litigation may reach $3.6 billion.

Bloomberg quoted David Felt, a former deputy general counsel at the Federal Housing Finance Agency, the conservator of both Fannie Mae and Freddie Mac who said of Bank of American's action, "I don't know if Fannie really cares; it's the largest mortgage purchaser in the world, and if Bank of America turns to Freddie Mac instead, that's like a different subsidiary of the same company."

 "This decision will not affect the credit available to our customers," Jerry Dubrowski, a spokesman for the bank, said in an e-mailed statement. "We will rely on other sources of liquidity to continue to ensure we are lending to our customers and supporting the housing-market recovery."

Andrew Wilson, a spokesman for Washington-based Fannie Mae, said the company had no comment on the bank's decision.