Bank of America Fails to Win Profits Eschewing Loans

Bank of America Corp. and Citigroup Inc. are missing out on the biggest mortgage profits on record after catastrophic losses during the housing crash made them wary of offering new loans.

“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. and JPMorgan Chase & Co., the two biggest home-loan originators.

Bank of America’s mortgage originations plunged by 37% to $21.3 billion in the third quarter from a year earlier. 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, N.C.-based bank has slumped to fourth, after it closed a business that bought debt marketed by third-party firms.

Residential mortgage lending at Citigroup dropped 5% 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,” CFO John Gerspach said in an April call with investors. The firm continues to reduce what Gerspach and CEO Mike Corbat describe as “noncore” 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.”

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% market share, urged employees this year to strive for 40% of the new home-purchase loan market.