Thursday, May 05, 2011
Mortgage Woes Hit Bank of America's Bottom Line
It's not just the average American consumer who is feeling the pinch of the nation's uneven economy. Bank of America Corp. is also facing having to do more with less these days. Already stung by a troublesome mortgage portfolio, the banking giant, less-than-stellar returns within profitable operations and costly legal settlements weighed heavy on the company's first-quarter bottom line.
There is no doubt, however, that Bank of America's mortgage business poses the biggest concern. Not only did it have to absorb $548 million in expenses and fines over its handling of Fannie Mae and Freddie Mac loans and $1 billion of repurchase-related costs related to government sponsored enterprises, but Bank of America also paid a $1.6 billion settlement to Assured Guaranty Ltd., which had backed up a portfolio of the bank's home equity and first-lien loans.
"The legacy costs, they just cannot get this behind them. Every quarter they try to reassure the Street that 'Most of this is behind us,' but they're having trouble dealing with it," Paul Miller, head of financial services research at FBR Capital Markets, told American Banker. "We've been factoring roughly $1.5 billion (of mortgage repurchase-related costs) a quarter — we're going to have to look at taking those numbers up."
A continued weakening in the housing and residential lending markets as well as housing prices nationwide have also dented Bank of America's mortgage arm. After announcing layoffs of 3,500 workers and contractors, Bank of America had to set aside a higher-than-anticipated $1 billion to cover representation and warranty claims.
"As far as [the house price index] going forward, we expect gradual improvement over the second half of the year," Bank of America's chief executive Brian Moynihan said, American Banker reported. Moynihan, however, said any gains would be modest. "It's a fairly simple picture: All of the businesses have moved back to profitability except our mortgage business."
Though Bank of America reported its first profit in three quarters -- $2 billion – it did not come close to meeting analysts' expectations. Its earnings mostly came on the back of declining credit-loss provisions, falling from $5.1 billion in the fourth quarter to $3.8 billion in the first quarter. Bank of America's revenues fell to $26.9 million, a 16 percent decline from a year ago. Only the company's wealth and investment division reported a year-over-year increase in revenue.
"Our largest initial concern is that the magnitude of mortgage-related items may not decelerate as rapidly as we have been expecting," wrote Sandler O'Neill analyst Jeff Harte.