Bank of America's Next Big Countrywide Problem
Two hundred sixty-three thousand.
Of all the numbers that have been batted around about the legacy of Bank of America's ill-fated Countrywide acquisition since the bank's big Justice Department settlement last week, that's the one to keep in mind going forward.
Brian Moynihan & Co. have attacked with gusto B of A's delinquent-loan portfolio in recent years, much of which came from the 2008 acquisition of Countrywide. But even after all that work — the chargeoffs, the loans sales, the renegotiations — the bank still has 263,000 delinquent loans on its books.
B of A has estimated that it will get back to a normal level of delinquent loans within two years, but that may be optimistic. Most of the loans it has left probably cannot be sold, and working out problem loans — especially those at the bottom of the barrel — is notoriously slow and labor intensive, analysts say.
"In later stages, the numbers are harder to move down," said Chris Mutascio, an analyst at Keefe, Bruyette & Woods.
Such a daunting challenge are fresh reminders of what everyone has known for years: Bank of America's purchase of Countrywide Financial in 2008 was a bad deal.
Estimates of exactly how bad have varied, but the Charlotte, N.C., bank has pegged total losses from the ill-fated acquisition at more than $63 billion over the past six years. That tally includes its purchase price, mortgage repurchase claims, litigation and settlements, loan-loss provisions and chargeoffs on residential loans and home equity lines of credit.
It's hard to find any silver lining — much harder than even JPMorgan Chase's acquisition of Washington Mutual, which was a big reason for its $13 billion settlement agreement with Justice last year but still gave the bank a big presence on the West Coast.
B of A can't even take satisfaction in the retail network it gained. It acquired 1,000 field offices from Countrywide, but it has since had to shut down many of them.
Countrywide "has been all cost and zero benefits" for B of A, said Isaac Boltansky, a policy analyst at Compass Point Research & Trading.
B of A also received a $1.5 trillion servicing operation, including a portfolio of nine million loans, but the cost to service the legacy loans has far exceeded revenues because of the portfolio's high delinquency rates, analysts say.
Moynihan, B of A's chief executive since 2009, has sold off more than a trillion dollars of nonperforming loans, mostly to nonbank servicers in response.
But there is still a lot of work ahead.
B of A has reduced its residential servicing portfolio to $760 billion as of June 30, down 23% from a year earlier. That's a far cry from the end of 2008, when B of A oversaw more than $2 trillion in mortgages.
There have been some complications in the transfer of mortgage servicing rights to other entities. Ginnie Mae has cracked down on servicers like B of A for selling some delinquent loans without having all the necessary documents including a proper title.
Problems with missing documents resurfaced this year in a program Ginnie created before the mortgage crisis. The program allowed large servicers to quickly transfer servicing rights if they agreed to send the essential records of the mortgage, deed of trust, title policy and other documents within roughly a year. If loans lack proper documentation, B of A may be stifled in trying to unload any more nonperforming loans.
As a result, the work ahead largely involves whittling down the 263,000 delinquent loans remaining in its legacy book. They are valued at $38 billion.
The bank has established a reserve based on loan performance so it's unclear how much in additional losses it would have to take on these loans.
The good news for B of A is that it has 81% fewer delinquent loans than the 1.4 million it held in the fourth quarter of 2010, at the height of the housing crisis.
"They're been aggressive, but they had to be given the costs," Mutascio said. "They sold some delinquent servicing, housing prices have gone up so losses have been reduced, and the overall economy has improved."
Still, B of A is stuck with perhaps the largest number of delinquent loans of any bank, analysts and servicing executives say.
Some of the delinquent borrowers can be refinanced or nursed back to health with loan modifications. Many will end up in a short sale, deed-in-lieu or foreclosure.
Moynihan said on a second-quarter conference call that reducing the number of delinquent loans and legacy costs to a normal level of $500 million a quarter is a major goal. Legacy servicing costs were $1.4 billion in the second quarter, down from $2.3 billion a year earlier.
"They believe they can get quarterly costs on servicing down to a normal level by late 2015 or perhaps early 2016," Mutascio said. "They've done a pretty good job of late but they have a year or two more to get there."