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The race for the exits is intensifying among big banks that purchase mortgages from correspondent lenders, creating liquidity issues for loan originators and radically reshaping mortgage servicing.
January 30 -
The Michigan company reported its fourth straight annual loss, despite a dogged attempt to harness problem credits.
January 25 -
SunTrust reported higher earnings on more lending, but a big jump in requests to repurchase mortgages and a hit to fee income stole the show.
January 20
When it comes to mortgage problems, Bank of America Corp. and its largest rivals are hogging most of the headlines. But smaller banks are also struggling with high levels of delinquent loans that are holding back a housing recovery.
Though mortgage divisions are making fat profits for companies like U.S. Bancorp, many regional banks are giving back those gains in payouts to Fannie Mae and Freddie Mac for lax compliance and underwriting during the bubble years. Some of those banks are taking
Regional players like SunTrust Banks Inc., which lost $700 million on mortgages in 2011, may also lack some of their bigger rivals' insulation from government charges over foreclosure abuses. Only the five largest mortgage servicers were included in
All of this has made some regional mortgage bankers take an extremely dire view of the market.
"I feel like I'm in Afghanistan walking across a minefield, and haven't stepped on one yet," says an executive who runs the mortgage lending group at a top-25 bank, who would not discuss the situation publicly.
For example, when borrowers fail to pay their mortgages, banks "are supposed to get the house back," the executive says. "But now we have let them live there for a year or two," as a result of various government programs designed to keep borrowers in their homes.
Banks' residential delinquency rates are still very high — at 12% on average in the fourth quarter, compared to a pre-housing crisis level of 3%, says
Matthew Anderson, a managing director at the Oakland, Calif., consulting firm Trepp LLC.
Many banks are still classifying large numbers of defaulted loans as "accruing," meaning they are telling regulators the loans will ultimately be paid back, Anderson says, adding that that classification is likely overly optimistic.
"The jaundiced view is that banks have avoided foreclosing because they don't want to go through the loss-recognition process," Anderson says. "The banks have reserved for losses, they've charged off a chunk of loans and they have reserves for future losses that might contain all the future costs, but the worry is that if they flood the market with distressed homes, that would push prices down and the losses would be larger than they estimated."
"The market is weak and there's a lot of problematic debt out there," he adds.
A handful of regional banks are picking up market share, as B of A, Citigroup Inc., JPMorgan Chase & Co. and other mega-banks
For example, Flagstar reported an 11% jump in home lending volume from a year earlier, to $10.2 billion in the fourth quarter. But the $13.6 billion-asset bank in Troy, Mich., is still struggling with buyback requests. It received $190 million in repurchase demands in the quarter and increased its repurchase reserve by $35 million.
At BB&T, mortgage revenue was flat in the fourth quarter from a year earlier, at $8.4 billion. The Winston-Salem, N.C., bank has been aggressive in unloading real estate-owned properties, which fell 41% in the quarter. It also has been selling off problem assets, which fell 17% in the quarter.
Still, BB&T chairman and chief executive Kelly S. King has been less than enthusiastic about the mortgage market. He
Meanwhile, SunTrust has been hit
SunTrust chairman and CEO Bill Rogers told analysts on a conference call last month that mortgage origination volume "continues to be healthy" and has "attractive margins." Still, volume fell 22% to $6.8 billion in the fourth quarter from a year earlier.
Bonnie Baha, a portfolio manager at DoubleLine Capital LP in Los Angeles, says that while many regional banks saw increased profits in mortgages, the fourth quarter generally was "a mixed bag" for them.
Regional banks have gained market share, she says, because "lending is concentrated in their home markets, they know their customers and that's what banking is supposed to be."
U.S. Bank, the fifth-largest home lender, appears poised for the strongest run at market share gains. It may even unseat B of A or Citigroup this year as a top-four lender, analysts say, because it never strayed into subprime during the bubble years.
U.S. Bank's mortgage revenue rose 22% in the fourth quarter from a year earlier, to $36.3 billion. The Minneapolis-based lender captured a 4.6% market share in the quarter, its highest level ever. But it also took a $130 million expense for mortgage servicing costs.
The bank said last month that there continues to be stress in its residential mortgage portfolio because of declining home prices. But analysts say U.S. Bancorp is in a better position than its peers because of its low level of outstanding repurchase requests, at $105 million.
None of the banks contacted for this article, including Flagstar, BB&T, SunTrust and U.S. Bank, would comment.
Brian Foran, an analyst at Nomura Securities, says that eventually the mortgage tailwind will go away, though precisely when that happens will differ for each bank. In the meantime, though regional banks are enjoying strong profits, much of those gains are being redeployed to cover past mortgage problems.
"The idea is, who gets to keep the money they make on lending versus who pays it all out in legacy putback costs," he says.
