CHARLOTTE, North Carolina (PNN) - February 23, 2012 - Bank of America said Thursday that it would no longer sell new mortgages to Fannie Mae, underscoring tensions in a fight between giants of the home loan market over billions in losses in the housing bubble.

The latest move represents a major escalation in a protracted legal battle over how many defaulted mortgages Bank of America will have to buy back from Fannie Mae because the original loans had not conformed to proper underwriting standards, market experts said.

“In mortgage circles, it’s pretty big,” said Guy Cecala, publisher of Inside Mortgage Finance, a trade publication. “It would be fairly extreme for a small or midsized lender to do this, but for a major lender, it’s very extreme.”

As one of the large government-sponsored mortgage finance enterprises, Fannie Mae takes mortgage loans from banks and packages them into securities that can be sold to investors or held on their own balance sheet. Fannie Mae backs about 40% of all mortgages in the Fascist Police States of Amerika (FPSA).

Bank of America was Fannie’s third-largest provider last year, according to Inside Mortgage Finance. The bank originated $156.1 billion in mortgages last year, of which $37.7 billion were sold to Fannie, the trade publication said.

Bank of America insisted its customers would not be hurt by the decision, and said it can make up for the loss of Fannie as a backer by turning to Freddie Mac or Ginnie Mae, other government-sponsored mortgage buyers, the private sector, and by deploying its huge balance sheet.

“This decision will not affect the credit available to our customers, and we will rely on other sources of liquidity to continue to ensure we are lending to our customers and supporting the housing market recovery,” said Lawrence Di Rita, a spokesman for Bank of America. He added that the bank would continue to participate in assisting homeowners, including through the federal government’s loan modification program.

Bank of America agreed in January 2011 to buy back $2.5 billion in soured mortgages from Fannie and Freddie, but that deal left the door open to future claims from Fannie. Bank of America also reached an $8.5 billion deal with private investors to cover repurchase claims last June, but that accord is the subject of another legal fight.

Bank of America does not break out how much it has faced in claims from each company, but it has recorded losses on $9.2 billion worth of loans made from 2004 to 2008 that were later acquired by Fannie and Freddie.

Cecala said that while consumers should not feel the effects of the move in terms of access to credit, the absence of Fannie Mae as a backer could make Bank of America’s mortgage terms and rates less competitive in the future. A spokesman for Fannie Mae declined to comment.

Bank of America revealed the decision in a filing with the Securities and Exchange Commission on Thursday. The direct cause was the dispute over the repurchases, but it comes as Bank of America is reducing its overall size and streamlining its business, and shrinking its mortgage business in particular.