Mortgage revenue at the four largest U.S. lenders is surpassing the costs of faulty home loans and foreclosures from the housing boom as Federal Reserve and government policies help fuel the recovery.
Wells Fargo & Co., JPMorgan Chase & Co., Bank of America Corp. and U.S. Bancorp reported $24.4 billion from home lending in 2012 and expenses of more than $21.7 billion for settlements and loan repurchases, according to data compiled by Bloomberg. Lower costs for firms such as Bank of America this year will act as a “tailwind,” as mortgage revenue remains strong, Goldman Sachs Group Inc. analysts said.
For all the money the government is collecting from banks tied to the worst housing slump since the Great Depression, lenders are still making record profits, thanks to policies that are driving the accelerating rebound. Loan originations totaled $1.75 trillion in 2012, the highest since 2009, according to the Mortgage Bankers Association, as homeowners took advantage of borrowing costs pushed down to record lows by the Fed and the White House expanded programs to help refinancing.
“They’ve come out from the self-inflicted gunshot wound to the head and are now starting to recover due to a government- induced set of policies and programs,” said Clifford Rossi, a former risk manager and managing director at Citigroup Inc. who’s now at the University of Maryland’s Robert H. Smith School of Business. Policies intended to assist homeowners serve “to help the banking segment significantly,” he said.
Banks made record earnings from mortgages last year as they were able to lend at rates much higher than the bonds they were packaged into. That disappointed policy makers including New York Fed president William C. Dudley, after the central bank kept its benchmark interest rate near zero since 2008 and bought $40 billion of mortgage bonds a month to push down borrowing costs.
Even with elevated profit margins, mortgage rates fell to 3.4% last week from 4.74% two years ago.
“The large banks are making a lot of money off of the Fed, and have been basically since it started buying mortgage backed securities,” said Walt Schmidt, a mortgage strategist at FTN Financial. “As long as the Fed continues to buy them in current volumes, there’s no way around it.”
Still, costs probably will come down. Bank of America, which has booked almost $50 billion in costs since 2007 including refunds and litigation tied to defective home loans and improper foreclosures, said last week that it has dealt with most of those expenses.
Faulty mortgages have cost five banks—Wells Fargo, Bank of America, JPMorgan, Citigroup and Ally Financial—at least $84 billion since 2007, according to data compiled by Bloomberg. In the second half, the four largest mortgage lenders reported about $16 billion of added costs.
“Banks with outsized environmental costs are best positioned to see operating leverage in 2013, as these costs decline,” Goldman Sachs analysts led by Richard Ramsden wrote in a Jan. 3 report. They defined those expenses as mortgage foreclosure and legal costs, and loan buybacks. Declines will be coupled with mortgage revenue that should “remain strong throughout 2013, as spreads remain wide and volume remains resilient,” the analysts wrote.
Goldman said that banks in the best position to benefit this year include Atlanta-based SunTrust Banks Inc., Bank of America, Citigroup and First Horizon National Corp. The 24-company KBW bank index was little changed today in New York trading after gaining 4.3% this month.
Wells Fargo has been the biggest beneficiary of a robust mortgage market. The largest U.S. home lender originated nearly 1 in 3 mortgages as of September and reported a 24% rise in fourth-quarter profit Jan. 11. Net gains on origination totaled $2.8 billion in the fourth quarter. In all of 2012, the firm recorded about $11.6 billion in mortgage banking income.
Mortgage banking could bring in another $10.9 billion this year, Chris Kotowski, a New York-based bank analyst with Oppenheimer & Co., estimated in a Dec. 20 report. The top four lenders, Wells Fargo, JPMorgan, U.S. Bancorp and Bank of America, will bring in $27.3 billion from mortgages this year, Kotowski projects.