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Big Banks Mark Up Servicing

WASHINGTON-The nation's "mega banks" posted strong operating earnings in the fourth quarter from their residential mortgage divisions, but the results, in part, were marred by horrific writedowns on their "legacy" assets.

But one positive for banks reporting thus far - Bank of America, Citigroup, JPMorgan Chase and Wells Fargo - is their ability to mark up the "asset value" of their mortgage servicing rights.

According to figures compiled by National Mortgage News, BoA and JPM marked up their MSRs the most among the four - by 51% and 65%, respectively.

The increase reflects the change in value from yearend 2009 compared to yearend 2008.

The ability to mark up the value of the MSRs was bolstered by rising interest rates, which translate into lower prepayment speeds. But an increase in value doesn't necessarily wash through to the bottom line and counter all the charge-offs being booked.

At first glance, BoA's residential unit appears to be earning money hand-over-fist on an operating basis - until credit charges are factored into the equation.

BoA, the nation's largest lender and servicer, reported a $3.8 billion loss in its "mortgage and insurance" division for all of 2009 compared to a $2.4 billion loss the year before. New figures show that $11.2 billion worth of credit charges (on delinquent loans) have more than wiped out its net profit in mortgage banking.

The bank noted that at yearend it had $35.7 billion in nonperforming assets (company wide) and a provision for credit losses totaling $48.6 billion - most of it tied to residential legacy mortgages brought in-house when it bought Countrywide Financial Corp. and Merrill Lynch and their respective residential divisions.

According to supplemental materials released along with its fourth-quarter earnings, BoA's mortgage banking division had an operating profit (before charges) of $1.8 billion in the fourth quarter, a 13% improvement over 4Q08. In the third quarter, its residential mortgage unit earned $1.4 billion before charges.

JPM reported strong earnings for the fourth quarter, but noted that the hangover from the mortgage crisis and the resulting loan "buybacks" forced on the company by Fannie Mae and Freddie Mac are continuing to hurt its bottom line.

In an earnings conference call chairman and CEO Jamie Dimon told analysts that repurchases are a worsening problem for the company and the industry at large. He noted that "you can assume" purchase requests on broker-sourced loans "will be worse."

He also signaled that buybacks have picked up in the mortgage industry as investors "assess their rights" and bring claims against lenders. However, he said he could not offer any "broad numbers" at this time. A year ago JPM said it would quit the residential wholesale channel but in recent quarters has still originated some loans using brokers.

Among the nation's largest bank players in mortgages, Wells Fargo appears to have done the best in the fourth quarter. Wells reported $3.4 billion in income from its mortgage banking operations, a 10% improvement from the third quarter.

Residential mortgage originations totaled $94 billion, down $2 billion from the second quarter. The company said the $55 billion of "Pick-a-Pay" mortgages acquired from Wachovia are "performing better than expected."

Nearly 50,000 of these payment-option mortgages were modified during 2009 and the borrowers monthly payments were reduced by 25% on average. The redefault rate is half the industry norm for payment-option mortgages, a company executive said.

Overall, Wells Fargo has placed nearly 500,000 of its mortgage borrowers in trial or permanent modifications during 2009. The 60-day redefault rate is about 14%, a company executive said.