“Loans have never been safer, they’ve never been more profitable,” said Scott Simon, the mortgage head at Pacific Investment Management Co., manager of the world’s largest bond fund. “Bank of America is the biggest mystery to us. Now I get that they got their faces torn off. But this is a different environment.”
Their reluctance is restraining Federal Reserve efforts to revive the U.S. housing market with central bank officials expressing frustration that lender profit margins are wide as it purchases $40 billion of mortgage bonds each month. The lack of competition also means billions of dollars of revenue are being funneled to Wells Fargo & Co. (WFC) and JPMorgan Chase & Co. (JPM), the two biggest home-loan originators.
Bank of America’s mortgage originations plunged by 37 percent to $21.3 billion in the third quarter from a year earlier, according to newsletter Inside Mortgage Finance. The bank has cut lending to reduce assets considered risky by regulators after its ill-timed purchase of Countrywide Financial Corp. in 2008. Once the largest home lender, the Charlotte, North Carolina-based bank has slumped to fourth, Inside Mortgage Finance data show, after it closed a business that bought debt marketed by third-party firms.
Residential mortgage lending at Citigroup dropped 5 percent to $16.6 billion in the last quarter, from a year earlier, according to Inside Mortgage Finance. Citigroup, which said in February it would stop using brokers to originate mortgages, this quarter fell below Quicken Loans Inc., the home lender founded by Cleveland Cavaliers owner Dan Gilbert, to sixth in the newsletter’s rankings.
“We continue to believe that mortgages represent the greatest risk to any major bank balance sheet and a number of headwinds remain,” Chief Financial Officer John Gerspach, 59, said in an April call with investors. The firm continues to reduce what Gerspach and Chief Executive Officer Mike Corbat describe as “non-core” assets at Citi Holdings, which contains $95 billion of U.S. mortgages.
“How does it get more ’core?’” Simon said. “If you’re Wells Fargo you sell six products to the average person who has a mortgage with you. It’s unbelievable. It’s a money machine.”
Even with Citigroup and Bank of America’s diminished participation, the top five companies reported a record $8.35 billion in income from mortgage banking during the third quarter, Inside Mortgage Finance data shows.
Wells Fargo, the largest U.S. home lender, made $141 billion in mortgage loans in the third quarter after second- quarter mortgage lending led to a record $2.89 billion in mortgage-banking income. The bank, which has about 30 percent market share, urged employees this year to strive for 40 percent of the new home-purchase loan market.
JPMorgan, the biggest U.S. bank by assets, made $50 billion of home loans in the quarter, a 29 percent increase from the prior year, according to the newsletter data.
Mortgage-production margins are “very high” at “well over” 2 percent, up from less than 1 percent historically, Chief Executive Officer Jamie Dimon, 56, said on an October conference call about its record $5.7 billion in quarterly earnings.
“As of September, 2012, Citi has shown significant growth and expanded market share during each of the past four quarters in retail-originated loans,” Sanjiv Das, CitiMortgage’s CEO, said in an e-mail. The bank said it made more than $60 billion in “new high quality real estate loans” in the same period.
Bank of America has focused “mortgage origination efforts entirely on our direct-to-consumer channels,” said Terry Francisco, spokesman for Bank of America Home Loans. This has “produced steady retail-originations market share growth throughout 2012.”
The industry is unable to expand to meet current demand in the refinancing market today, according to Paul Miller, an analyst at FBR Capital Markets Corp. Retail lending won’t be enough to make up for the capacity that has been taken away from all the mortgage banks that went out of business in 2008, he said.
Lending will total $1.75 trillion this year, the Mortgage Bankers Association estimated last month, the highest since 2009, when originations were $2 trillion. The group projects refinancing will account for 71 percent of the volume, up from 46 percent in 2008.
The average rate for a 30-year fixed mortgage was 3.37 percent in the week ended yesterday, up from 3.32 percent, McLean, Virginia-based Freddie Mac said in a statement. The average 15-year rate slipped to 2.65 percent from 2.66 percent.
Still, borrowing costs could be about 0.5 percentage point lower, if the gap between the two matched its size in the five years through 2007. The spread between so-called primary and secondary rates is now more than 1 percentage point, after spiking to more than 1.8 percent when the Fed announced its $40 billion of monthly government-backed mortgage bond purchases that began in September.
“The fact that mortgages are being offered at stubbornly high rates suggests that lenders are reluctant to engage in mortgage banking despite the profit potential,” said Merrill Ross, an analyst with Baltimore-based Wunderlich Securities Inc. in a report this week. “This is slowing the recovery in home prices and slowing the potential benefits to the economy of lower interest rates.”
The failure of central bank policy to loosen mortgage credit has frustrated Fed Chairman Ben S. Bernanke and Shaun Donovan, secretary of the U.S. Department of Housing and Urban Development. They’ve expressed concern that banks are preventing qualified borrowers from taking advantage of the record low interest rates as the housing market recovers after a six-year slump and federal incentive programs encourage homeowners to refinance.
“All these national players are doing are the perfect loans,” said Miller, a former examiner with the Federal Reserve Bank of Philadelphia. “They don’t want to take any risk, and that’s where marginal borrowers are being forced out.”
Borrowers whose loans closed in November, 68 percent of which were refinancings, had an average credit score of 750, according to data compiled by Pleasanton, California-based Ellie Mae. Homebuyers with Fannie Mae and Freddie Mac loans made down payments averaging 21 percent.
Banks have to make sure the loans they originate are “ironclad,” Bank of America’s Chief Executive Officer Brian T. Moynihan said last week during a speech at the Brookings Institution in Washington. “There’s no doubt that post-crisis credit is tighter.”
Margins have widened after firms cut staff and closed down operations, leaving lenders with more business than they can handle. 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.
Bank of America closed Countrywide Financial Corp. operations, JPMorgan shut down Washington Mutual Inc.’s mortgage business, and Citigroup and Ally Financial Inc. (ALLY)’s GMAC Mortgage are playing a much smaller role in the overall lending market, according to Miller.
Bank of America and Citigroup suffered a combined $258 billion of writedowns and credit losses, mainly from mortgages, from the third quarter of 2007 to the second quarter of 2011, according to data compiled by Bloomberg. The banks took $45 billion each in government bailout funding, the most of any other lenders.
Losses from Countrywide, the largest U.S. mortgage lender as recently as 2007 before billions of dollars in soured loans prompted its sale to Bank of America, have continued to plague the lender, leading to more than $40 billion in losses and its retreat from the market. Last year, Moynihan, 53, stopped reverse-mortgage lending and shuttered the business that bought loans from correspondent providers.
“We are not doing the job we need to do” in mortgages, Moynihan said this month at a New York investor conference sponsored by Goldman Sachs Group Inc. (GS) “We know that, everybody knows that. The volumes are high, the process is difficult.”
Fannie Mae, Freddie Mac and other buyers of mortgages have demanded compensation for shoddy loans created by Countrywide, claiming home loans were based upon flawed data about the properties and borrowers.
Bank of America’s Countrywide unit also has been locked in litigation with MBIA Inc. since 2008. The lender said last week it issued a notice of default to MBIA, after buying some of the bond insurer’s notes in an attempt to block a legal maneuver in their dispute over toxic mortgage assets. MBIA Inc. is separately suing the bank, seeking to force it to buy back faulty loans in insured mortgage-backed securities, and it claims the bank is delaying that case to starve the insurer of cash.
Bank of America, Wells Fargo, JPMorgan, Citigroup and Ally set aside almost $3 billion to buy back bad home loans in the first half of 2012, according to data compiled by Bloomberg.
Unresolved demands that Bank of America repurchase mortgages rose 12 percent to $25.5 billion as of Sept. 30, fueled by disputes with Fannie Mae and private investors, the firm said.
Adding to capacity constraints at banks is the difficulty in managing the volume of employees through a refinancing wave “since a modest rise in interest rates could eliminate 80 percent of the business and leave the originators with expensive fixed costs,” Deutsche Bank AG analyst Steven Abrahams said in a Dec. 12 report.
About $4.5 trillion in agency mortgage-backed securities have “meaningful refinancing incentives” and with the debt averaging $176 billion in the last three months, it would take more than two years to work through it all, according to Deutsche Bank.
“It seems unlikely that capacity could grow quickly enough to reduce the backlog and spur rate competition,” Abrahams said.
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