I’m aware that Bank of America is crowing about settling put-back claims with Fannie Mae and Freddie Mac for about $2.8 billion. Their stock has soared on the news. Obviously investors feel that this was the biggest hurdle to avoiding mass apocalypse on repurchases, and that BofA can now move forward with more certainty.

There’s some reason to agree with this. While there are plenty of outstanding claims on BofA and its competitors, Fannie and Freddie were in a stronger position to force repurchases on the banks than the monoline insurance companies or private investors. And, given the unpaid principal balance on the loans described, the GSEs got between half a penny and a penny on the dollar, between 0.5% and 1% of the original value of the security. So I can see how BofA would be excited that they made out like bandits on this deal.

However, 1% of unpaid principal balance was basically the expected scenario, in line with the success rates of private investors so far. And more important, this only has to do with “representations and warranties” suits; in layman’s terms, the charge that BofA (or more accurately Countrywide) made fraudulent representations about the loans inside the mortgage-backed security, specifically that they had better underwriting standards than reality. That’s not the only measure that monolines, private investors or even the GSEs are using to demand repurchases. The FHFA release specifically says that this does not absolve BofA of any responsibility for other misrepresentations. For example, if Countrywide failed to convey any of the mortgage assets in these loan pools to the trusts – which is increasingly likely to be the case – that would not be covered by this settlement.

So, not only does Bank of America have to deal with lawsuits on around $375 billion in mortgage-backed securities, they still have to contend with potential claims on these GSE loans they believe they’ve settled. Compass Point, a market analyst, estimated another $5.5 billion in liability for BofA from future repurchase requests from Fannie Mae alone.

The stock market – and most of the experts – don’t see much of a liability here, and certainly not a systemic risk. That’s why BofA stock is rising. But it should come as no surprise to state that the market is wrong a lot, especially on this issue. Even now, investors are underestimating problems in the housing market generally. They have consistently downplayed foreclosure fraud and the liabilities contained within. They are habitually not taking shadow inventory into account when assessing housing prices. Is it really such a stretch to consider an overreaction to one settlement, spinning it out into a belief that the banks are out of the woods on their mortgage liability?