The bursting of the housing bubble and subsequent financial crash affected all the big banks to some degree, but perhaps none as much as Bank of America (BAC 2.06%). To say the purchase of Countrywide Financial in 2008 was "ill-timed," as one Bloomberg journalist recently put it, is the understatement of the year.
The massive mortgage originator was loaded with subprime loans that were just waiting to blow up, and after its purchase they promptly did, causing an enormous amount of financial mayhem for B of A. But the Countrywide debacle has left the bank not just with a scarred balance sheet but also with a scarred internal culture. Now, fears of going all-in on a resurgent housing market are keeping B of A from making the kind of money it should be.
Once bitten, twice shy
"Loans have never been safer; they've never been more profitable. Bank of America is the biggest mystery to us," says Scott Simon, head of mortgage at the world's largest bond fund, Pacific Investment Management Co. "Now I get that they got their faces torn off. But this is a different environment."
In the third quarter of 2012, B of A's mortgage originations declined 37% year over year. At one time, B of A was the country's biggest mortgage lender, and now it's the fourth. And B of A isn't the only big bank feeling shy about jumping back into the mortgage market. Citigroup's (C 3.06%) home-lending numbers are off, too: down 5% year over year for Q3.
In an April conference call, Citi's CFO John Gerspach told investors: "We continue to believe that mortgages represent the greatest risk to any major bank balance sheet and a number of headwinds remain."
Group therapy time
So if B of A and Citi aren't making the kind of money they should be in this resurgent housing market, it stands to reason someone else is. That someone -- or someones in this case -- are JPMorgan Chase (JPM 1.94%) and Wells Fargo (WFC 1.24%). In the third quarter of 2012, JPMorgan made $50 billion in home loans, up 29% year over year. Wells Fargo made $141 billion in home loans for Q3. With 30% of the new-home buying market (and shooting for 40%), the San Francisco based bank is now the country's biggest mortgage lender.
Scott Simon is completely correct when he said the lending environment has changed. It was subprime lending that blew up the banks. Well, that, coupled with the banks' insatiable greed. The CDO machine that so many U.S. banks were running demanded more and more loans for packaging up to investors; when qualified mortgage applicants ran out, the banks reached farther and farther down the line, until finally they were issuing what were whimsically referred to as NINJA loans, short for "no income, no job, no assets."
So far as we know, that kind of craziness is no longer occurring, but getting burned so badly in the housing market has left B of A maybe understandably gun-shy when it comes to mortgage lending. The bank is clearly overreacting. Management is going to have to overcome its fears of increased home lending if it wants to be a continuing player in the U.S. housing market, which, in good times, contributes up to 18% of GDP. There's a reason Federal Reserve Chairman Ben Bernanke's most recent attempt to boost the U.S. economy, better known as QE3, is so focused on jump-starting the housing market.
Money is being made in the mortgage market right now -- just not enough of it by B of A. If I were CEO Brian Moynihan, I'd get my senior management into some sort of therapy group for trauma victims, and I'd do it very soon.
