These Banks Are Missing Out On the Money Machine

Mohsin is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.

The Fed has been busy in its efforts to revive the US housing markets, however, Citigroup (NYSE: C) and Bank of America (NYSE: BAC) have been reluctant in offering new home loans and are missing out on the biggest mortgage profits on record after the housing crash.  Both the banks suffered $258 billion in credit losses and writedowns, largely related to mortgages from 3Q2012 to 2Q2011. Much to the dismay of the Fed, the mortgage banking industry has shed about $1 trillion of capacity to make home loans since 2005, according to FBR Capital Markets, after the housing market burst and triggered the global credit crisis three years later. Data compiled by Bloomberg reveals, Bank of America, Wells Fargo, Citigroup, JPMorgan and Ally set aside almost $3 billion to repurchase soured mortgages only in the first half of 2012.

Bank of America

Mortgage originations at Bank of America during the third quarter of this year plunged to $21.3 billion, 37% down from a year ago. Compared to the linked quarter, residential mortgage lending balance on the bank’s balance sheet plunged 2% to $250.5 billion, while the interest income from residential mortgages declined 6% sequentially to $2.3 billion.

Bank of America has reduced mortgage lending to get rid of the assets considered risky after its ill-timed purchase of Countrywide Financial Corp in 2008. Countrywide Financial has been locked in litigation since 2008.The Freddie Mac and the Fannie Mae among other mortgage buyers have demanded compensation for inferior quality mortgages created and sold by the unit. Most of the buyers of mortgages are claiming that the told loans were originated on incorrect data related to the borrowers and the properties under consideration. Similarly, MBIA is also suing the unit for selling soured mortgages to it. These unresolved disputes and demands by mortgage buyers to buy back bad loans reached $25.5 billion, increasing 12% as of September.

During the most recent quarter, mortgage lending at Citigroup plunged to $16.6 billion, down 5% year over year. Bank of America is scheduled to report fourth quarter results on January 17, 2013, while Citigroup will report is performance on January 17, 2012.  

The Missed Opportunity

Data released by Inside Mortgage Finance shows, $8.35 billion in income from mortgage banking by the top 5 companies during the third quarter, even after Bank of America and Citigroup reduced their participation. The CEO of JPMorgan said, “mortgage production margins are very high at well over 2%, up from less than 1% historically.”

Mortgage lending at Wells Fargo (NYSE: WFC) remained at $141 billion during the third quarter, while JPMorgan (NYSE: JPM) made $50 billion of residential mortgages during the same time. Mortgage lending at JPMorgan grew 29% year over year. Lack of competition from Bank of America and Citigroup means billions of dollars will be directed to JPMorgan and Wells Fargo, both the two largest home lenders in the US. I believe, both JPM and WFC will benefit from this lack of competition in the US mortgage market during the fourth quarter of this year.


Bank of America trades at a 45% discount to its third quarter book value, while Citigroup trades at 38% discount. JPMorgan trades at a 12% to its book value, while Wells Fargo has expensive valuations, as it trades at 28% premium to its book value.


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