Bank of America's In for a Shock

Sometimes, the little things are the most critical -- and on Bank of America's (NYSE: BAC  ) recent earnings call, one tiny detail stood out.

It wasn't the massive earnings miss, the $3 billion in charges, or the $1.6 billion settlement with Assured Guaranty (NYSE: AGO  ) for bad mortgages. (A similar dispute with MBIA (NYSE: MBI  ) could result in a heftier charge, according to The Wall Street Journal.)

It was Chief Accounting Officer Neil Cotty describing a 4% decline in home prices this year as a "shock" scenario. That comment came roughly a month after a pessimistic MacroMarkets survey. Here's what MacroMarkets gleaned from 111 economists, real estate experts, investment and market strategists:

Overall, the sentiment among our expert panel regarding the U.S. housing market outlook continues to deteriorate.... The March expectations data are the most pessimistic collected to date.... Many more experts are now projecting a double-dip.... In December, only 15% of our panelists were projecting that a new post-crash low would materialize for national home prices. Now, just three months later, almost 50% foresee a double-dip happening this year.

The mean response to MacroMarkets' survey calls for a year-over-year price decline of 1.4% in Q4 2011. But a 4% decline, which B of A called a shocker, is within one standard deviation. In plain English, it's normal. About one of six survey respondents expects U.S. housing prices to decline more than 4% this year. One expects an 11% decline.

MacroMarkets isn't alone. On Feb. 1, Fiserv forecast that average prices of single-family homes would fall 5.5% over the following year. In contrast to MacroMarkets, Fiserv's forecast is driven by data from the Case-Shiller index and the FHFA.

Furthermore, on JPMorgan Chase's (NYSE: JPM  ) recent earnings call, CEO Jamie Dimon said that mortgage-related losses remain "extraordinarily high" and "will continue for a while." While that's not a call on housing prices, JPMorgan appears to be taking a more conservative view than B of A.

Foolish takeaway

B of A's "shock" scenario runs against the consensus. It could drive another $1.5 billion in 2011 charges. For perspective, this quarter's net profit was $2 billion.

B of A's "shock" comment tells me that management is in denial, and that the stock is a risky bet.

Fool contributor Cindy Johnson does not own shares of any stock in this story. The Fool owns shares of Bank of America and JPMorgan Chase. Through a separate Rising Star portfolio, The Fool is also short Bank of America. 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.


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Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On April 21, 2011, at 7:36 PM, plvo38 wrote:

    already baked in to the stock price, too cheap now

  • Report this Comment On April 22, 2011, at 12:24 PM, slingbuck wrote:

    can you say coerce? this story reads like you should be in the white house, talking out of both sides of your mouth.

  • Report this Comment On April 23, 2011, at 4:25 PM, benboothe wrote:

    When two members of the Bank of America Board announced "The bank is already insolvent, we should admit that to the stockholders" it confirmed reports that the largest bank in America is in deep trouble. Considering the economy, and the depth of the problems BOA faces, we doubt that the bank will ever be the same. Many experts believe that it will be nationalized to avoid failure, and others believe that Citi, Chase and Wells Fargo are not far behind.

    Nationalization of the banking system is a monster in the dark that has lurked in the nightmares of bankers for 50 years. But, it is normal, when there are abuses, poor management, greed bound policies, and lack of loyalty to consumers as well as communities, banks are bound to be targets of nationalization.

    For example, the giant banks are still making billions by charging excessive interest rates on credit cards, in spite of legislation that was passed to stop abuses. Millions of people are still paying 21% to 29% of their credit card loans. Why? Because the banks can do it, and they exploit every opportunity. So, the people of the USA won't be sad at all when the big boys go down.

    I heard a story about a millionaire recently, whose secretary took 5 days off to be with her children during spring break. The man's personal credit card payments to Citi and Chase did not get mailed and were thus 5 days late. They raised this man's rate to 29% and told him; "You are a preferred customer, but this is our policy now." A few weeks later American Express, Capital One, Wells Fargo, Chase and Citi all lowered his credit card lines of credit. Then all of them began to charge 29%. Then they said: "Your credit score has gone down, so now you are considered a high risk and an undesirable customer." So, a millionaire with 30 years of perfect credit, suddenly was downgraded from AAA to XXX and deemed a flake, because of a greed centered system. No, the American people will not regret it if the big banks fail, or get nationalized. They essentially are going to be "downgraded" from AAA to XXX. What goes around comes around.

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