Bank of America's Retreat from Mortgage Lending
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Bank of America (NYSE: BAC) reported improved earnings recently, on the reduced impact of one-time charges. Tucked among the quarter’s highlights was an 18% increase in first-lien mortgage originations. That increase surprised me, since B of A has been slowing their residential mortgage lending. In December 2009, we refinanced our mortgage with them. We’re not a prime market nationally, but we’re in a fairly wealthy area for our locale, and we’re metro, not rural. Financing is not an issue at all in normal times. Back in 2010, Bank of America’s rates were low, competitive with any rates advertised nationally. It was fast and simple; no other bank I talked to was really even interested. They all provided quotes well above nationally advertised rates, with a take it or leave it attitude. In fact, when we closed on the loan, the notary that handled the signing told me that B of A was the only bank doing any volume of mortgage loans in our area.
Times have changed. With interest rates so absurdly low, I decided to refinance again, this time to a 30-year fixed loan. B of A was among my first stops. When I talked to a loan officer, the quote was uncompetitive, almost half a point higher. When I replied that it wasn’t competitive, he countered that other banks were using teaser rates that they’d pull back when actual assessments came in lower. And that was it. He made no real effort at all to sell a loan. I came away with the feeling that they really didn’t want the loan, unless the rate was right. And “right” was well above market level. This was the same feeling I got when talking to other banks in 2010. They were more than happy to talk to you, but the rates they’d quote didn’t match rates you’d find advertised on the internet. Unlike 2010, B of A was no longer acting like a motivated lender.
The experience left me wondering if Bank of America’s retreat from the residential mortgage market was even more extensive than I thought. Bank of America very publicly left the correspondent mortgage market a few quarters back. But, this was a retail loan inquiry by a current customer. And the experience was night and day compared to a year and a half ago. A look at quarterly numbers shows just how dramatic the drop has been. It’s quite striking, and it actually started well before they exited the correspondent market. In 2009, B of A trailed only Wells Fargo & Company (NYSE: WFC) in originations, with quarterly numbers approximating $100B. In the second quarter of 2012, B of A originated only $18B in residential mortgages, and that was up from their prior quarter.
Total mortgage originations for the top four lenders appear in Figure 1. All of the other four largest originators are operating at higher volumes than a year ago. Over the last three and a half years, JPMorgan Chase & Co. (NYSE: JPM) has been the steadiest of the four, with origination volumes almost unchanged quarter to quarter. Wells Fargo is back to dominating the mortgage market after a slight slowdown. Their originations are actually back to their prior highs, pushing through the $120B mark. In the second quarter, Wells originated a third of all residential mortgages. The other big mover is US Bancorp (NYSE: USB). With B of A’s retreat, USB is now the fourth largest originator, raising its residential mortgage originations 116% from the second quarter of 2011. USB’s strong growth undoubtedly has a lot to do with their shares’ excellent performance in a down market for financials. Among the four, only Bank of America is down in mortgage lending.
As a group, the regionals are well poised to fill the void left by Bank of America’s cut back in mortgage lending. In the end, we refinanced through another regional bank, KeyCorp (NYSE: KEY). A third, First Niagara was also actively lending. Overall, the process was as quick and painless as the B of A refinancing in 2010. Ironically, Key Bank was one of two regionals that bought branches in our area as another mega-bank, HSBC, retreated from much of its US operations, choosing greener pastures overseas. Both seemed motivated to get new business, and both gave us competitive quotes that matched nationally advertised rates. In Q2 of 2012, Key Bank originated just $10.3B of new or renewed lending commitments. That’s the whole enchilada: commercial, residential, home equity and consumer credit. Bank of America, now the smallest of the big four mortgage lenders, doubled that number with just retail mortgage originations. But, the regionals seem to have unlocked the doors and are back competing with the big money center banks for our business. With the void left by Bank of America’s reduced retail lending, the stronger regionals may be worth a look for investors.
The Author owns BAC shares. The Motley Fool owns shares of Bank of America, JPMorgan Chase & Co., KeyCorp, and Wells Fargo & Company and has the following options: short OCT 2012 $33.00 puts on Wells Fargo & Company and short OCT 2012 $36.00 calls on Wells Fargo & Company. Motley Fool newsletter services recommend Wells Fargo & Company. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.If you have questions about this post or the Fool’s blog network, click here for information.