Bank of America (BAC) executives said Fannie Mae will either have to file litigation or agree to a settlement to resolve the dispute over mortgage repurchase claims.

The bank and the government-sponsored enterprise disagree over $7.9 billion in mortgages Fannie claims BofA should buy back because of faulty origination practices, up from $3.7 billion at the end of last year. The bank said it should not have to buy back the loans because borrowers made at least 25 monthly payments on them.

The claims stem from mortgages originated in 2006 and 2007, BofA Chief Financial Officer Bruce Thompson told investors Wednesday.

"We clearly have a disagreement," Thompson said. "Either they bring an action or there would be a settlement. Those would be the two ways this would get resolved."

Reserves for total repurchases increased slightly to $15.9 billion.

Total outstanding claims increased roughly 41% to $22.7 billion in unpaid principal balance.

Repurchase claims from both Fannie and Freddie Mac increased to nearly $11 billion from $8.1 billion three months before. Possible repurchase losses from the government-sponsored enterprises alone could reach $5 billion.

A settlement struck with Syncora Guarantee announced this week reduced repurchase claims from monoline insurers by 20% from the $3.1 billion reported in BofA's second quarter filing.

But claims from private-label mortgage bond investors nearly doubled to $8.6 billion as of May 31.

"We expect these claims to continue to grow as the process for ultimate resolution continues to evolve and remains unclear," Thompson said.

The bank does expect to reduce its inventory of delinquent mortgages it services by 300,000 over the next 12 months.

BofA services more than 1 million home loans at least 60 days delinquent. It reduced that inventory by 214,000 since one year ago and expected more than a 27,000-loan decline in the second quarter were it not for the $25 billion foreclosure settlement with the Justice Department and the 49 state attorneys general.

Executives said it would transfer servicing for 15,000 delinquent loans in July.

"The reduction in the second quarter was lower than we would have expected as a result of DOJ, AG settlement, because of holds on loans we were attempting to modify," Thompson said.

Progress on its past mortgage problems, much of it inherited from the Countrywide acquisition, cost the bank $2.6 billion in the second quarter.