It’s been tough go for U.S. banks in recent years. Most banks, by nature, however, are aggressive and they hardly missed a beat. There are two banks, though, that seem to be a bit unsure of whether or not it’s time to jump back into the mortgage sector and the big question folks are asking is, “Why?” They’re missing out on huge profits, leaving other banks to pick up the slack – and the big money. Interest rates are down, the Fed’s pushing hard and yet, they’re not budging.
By now, we know that profits are breaking records these days in the mortgage industry. It’s a great time to be making mortgage loans, but Bank of America and Citigroup Inc. are anything but aggressive in this particular area.
Granted, they lost big during the mortgage meltdown, but one would think that they understand it was the decisions made inside the banks that led them to so much trouble. And, too, one could conceivably believe that because of that they now know they can’t make the rules up as they go.
Mortgages are once again becoming safe investments. Most banks are eagerly writing new contracts for home loans and they know, too, that in this game, it’s all about striking while the proverbial iron is hot.
The numbers tell the tale, though. For year, Bank of America was a leader in mortgage originations. That said, in the years since the recession, its originations have fallen drastically – 37 percent to be exact – to $21.3 billion in the third quarter from this time last year.
Wells Fargo remains the largest U.S. home lender and it’s responsible for $141 billion in mortgage loans during the third quarter. Second quarter lending was also a record high of $2.89 billion in mortgage banking income.
It currently accounts for around 30% of the market share and it’s been rumored to have encouraged its employees to aim for 40% in 2013.
For its part, the largest American bank by assets, JPMorgan Chase, made $50 billion of home loans in the third quarter which accounts for a 29 percent increase from the same quarter 2011.
According to CEO Jamie Dimon, during a conference call several weeks ago, mortgage-production margins are “very high” at “well over” 2 percent, up from less than 1 percent historically.
Unfortunately, it also means that the other big banks that have had their own controversies are now quickly taking advantage of what the more hesitant banks are leaving on the table.
And what’s being left on the table equates to billions of dollars – and for the most part, JPMorgan Chase and Wells Fargo are right there to scoop it up. This could prove problematic in an industry that is synonymous with “too big to fail”.
This hesitance is causing other problems, too. As we know, the Fed is doing everything in its power to breathe life back into the American housing sector, but when it’s met with lenders who don’t want to….well, lend…it can surely complicate things.
Already, higher ups in the industry are expressing disbelief that lender profit margins are wide as efforts to purchase $40 billion in mortgage bonds continue.
So why the hesitance? Suggestions are that the banks have decide to reduce their respective risky assets; in fact, Bank of America is likely still leery after its purchase of Countrywide more than four years ago.
It’s brought untold problems to the bank, including massive fines totaling $335 million because it was ruled Countrywide discriminated against Hispanic and black homeowners.
Not only that, but less than a year ago, last February, to be exact, Bank of America was fined a whopping $1 billion for “fraudulently and recklessly” underwriting loans to unqualified borrowers. In short, it was found to have defrauded the Federal Housing Administration (FHA).
Meanwhile, lending at Citigroup fell 5 percent to $16.6 billion in the last quarter, from a year earlier. You may recall the bank announced it would no longer use brokers to originate its mortgages this past February.
A few months later, its CFO, John Gerspach, said his bank believed mortgages represented the “greatest risk to any major bank balance sheet” and cited too many headwinds as a reason it would remain hesitant moving forward.
So is the mortgage really on an upswing? According to the numbers, it would appear so. The top five heaviest mortgage lenders made a record $8.35 billion in income from mortgage banking in third quarter 2012.
In a recent email, CitiMortgage CEO wrote,
As of September, 2012, Citi has shown significant growth and expanded market share during each of the past four quarters in retail-originated loans.
He went on to say his bank earned more than $60 billion in what he referred to as “new high quality real estate loans” during the same time period.
As Bank of America continues to focus on “mortgage origination efforts entirely on our direct-to-consumer channels,” according to Terry Francisco, a spokesperson for the bank’s mortgage arm, it continues to produce a consistent stream of retail originations growth during 2012.
So what happens if the banks are no longer able to meet the housing funding demand? And is that even possible? Not only is it possible, but it’s already happening.
It’s important to remember the massive number of banks that simply closed their doors during the 2008 mortgage meltdown. And this year, it’s expected lending will hit the $1.75 trillion mark, and this is the highest it’s been in years.
For his part, Fed Chair Ben Bernanke is reportedly “frustrated” due to the fact some banks are simply not engaging customers who are well qualified into taking advantage of incredible low interest rates.
He’s been said to be frustrated because the players are doing “the perfect loans” and that they refuse to take any risks, which is forcing some borrowers to bail on their efforts of buying a home.
The average credit score for borrowers in the month of November who were buying or refinancing a home loan was 750. Despite their concerns that a “perfect” loan is hard to find, Bernanke and Co continue to voice their disbelief that the banks are playing a no-win game.
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