Bank of America kept 90% of its second-quarter mortgage production in portfolio, an unusually large amount compared with the typical practices of other commercial banks.
"The banking sector over time has held ... mortgage whole loans within a very narrow band of between 15% and 20%," Fannie Mae Chief Economist Doug Duncan said. Banks “almost never go below 15%, and they almost never go above 20%."
B of A has increased the number of residential mortgages it elects to keep on its balance sheet for over a year, but the recent quarter was well beyond its recent levels.
The bank (including its Merrill Lynch and U.S. Trust subsidiaries) originated $13.2 billion of first mortgages during the quarter; that was $3 billion less than in the same period last year, when it held approximately 75% of production on balance sheet.
In contrast, Wells Fargo, the nation's No. 1 mortgage lender, did $56 billion in originations in the second quarter, with $14 billion (25%) of that total held for investment. For the same period in 2016, of its $63 billion of originations, $17 billion (27%) was held for investment.
Brian Moynihan, B of A’s chairman and CEO, defended the shift during the bank’s second-quarter conference call.
"We believe retaining these mortgages on our balance sheet provides better economics over time," Moynihan said.
A depository will always keep a portion of its mortgage production on its balance sheet, primarily loans that have no appeal in the secondary market. Typically those are jumbo loans; some banks also look to keep their adjustable-rate mortgage originations in portfolio.
Up until the last year or so, the share of mortgages banks had been putting in portfolio was closer to 20%, the high end of the historical range, Duncan said.
"That to us was logical because at the outset of the expansion after the crisis, it was the higher-income households that had the resources to be able to take out mortgages and buy homes," he said, noting that banks look to sell other products to borrowers, especially those who take out jumbo loans.
Overall, Bank of America had mixed results in home lending in the second quarter.
The amount of residential mortgages on B of A's balance sheet grew to $197.4 billion as of June 30, compared with $185.9 billion a year earlier. Over the same period, consumer loans on the balance sheet fell to $447.4 billion from $451.9 billion; the biggest contributors to the decline were a nearly $10 billion reduction in home equity loans to $61.9 billion, as well as a total exit from non-U.S. credit card lending that wiped another $9.4 billion off the books.
Mortgage banking income for the quarter suffered because by keeping the loans on the books, Bank of America did not receive any gain-on-sale income from them. B of A recorded $230 million in mortgage banking income for the quarter, down from $312 million a year earlier.
But going forward, the lost gain-on-sale income could be made up from net interest income as the borrowers make their monthly payments.
Production income was $67 billion, down from $182 billion in the second quarter of 2016.
In the pre-crisis days, Bank of America "was driven by a basic view of generating more and more mortgages as opposed to customers," Moynihan said, adding that three-quarters of mortgages in those days came from correspondents or mortgage brokers. Today the bank is predominantly a retail operation; it exited wholesale in October 2010 and correspondent lending nearly a year later.
"They're our customers," B of A Chief Financial Officer Paul Donofrio said during the call. "It's not like we're trying to find somebody else's underwriting. These are our customers. We know these customers."
There is no guarantee that Bank of America will keep putting 90% of mortgages on its books.
"We have flexibility to make that determination based on our own economic viewpoint," Steve Boland, managing director of consumer lending, said in an interview. "Where we have the capacity and our desire for adding assets, we will do that. Where we want to sell those loans into the secondary market, we can do that as well."
And at some point the bank could elect to sell its seasoned production in the secondary market. Conforming mortgages in the portfolio with loan-to-value ratios over 80% have private mortgage insurance just in case they are sold to the government-sponsored enterprises.
B of A did not break out the percentage of loans that were eligible for sale to the agencies.
At the end of the quarter, Bank of America had $1.26 trillion in deposits, and that affords the opportunity to retain such a large percentage of its mortgage production.
It provides a level of flexibility for when it has "the appetite for more loans on our balance sheet — we can allocate them to our balance sheet and the economics are very favorable," Boland said.