The big banks' mortgage expenses keep piling up, in a backlog that is likely to drag down their profits — and a broader housing recovery — for the foreseeable future.
As the largest banks reported quarterly results this month, they took charges for repurchasing soured loans, complying with federal mortgage servicing standards, paying for an upcoming settlement with state attorneys general and resolving significant foreclosure and litigation costs.
The mortgage woes at big banks have been so dire for so long that Jamie Dimon's comment this month that JPMorgan Chase & Co. was "getting killed in mortgages" became a footnote rather than the main story.
Even Wells Fargo & Co., which posted the strongest fourth-quarter mortgage results and now controls a third of the U.S. mortgage market, had significant costs for loan repurchases and mortgage servicing failures. It posted about $300 million in costs related to mortgage servicing and foreclosures.
The worst problem, analysts say, is that the banks' fourth-quarter charges do not necessarily signal any sort of resolution to the litigation and regulatory risk for banks with significant mortgage exposure.
"The optimistic view is these are one-time charges and they will be over and done with," says Brian Foran, an analyst at Nomura Securities. "But some of the charges are not big enough to cover everything."
Foran singled out U.S. Bancorp and PNC Financial Services Group Inc., which both took charges in the quarter related to the pending settlement agreement with state attorneys general and to the cost of complying with federal consent orders for past mortgage servicing failures.
But those expenses might not be enough to cover the banks' exposure from the settlement, which has been negotiated for months. Foran cites some concern that banks will have to "dig deeper" by giving borrowers principal reductions beyond the upfront costs of a settlement. Because banks cannot talk in detail about the settlement before it is finalized and announced, they have not been able to explain what the payouts would actually cover, he says.
Though mortgage banking profits are up and origination volume increased for some banks in the fourth quarter, mortgage loan growth has fallen from a year ago. Bank of America Corp.'s pullback in correspondent lending continues to remake the overall mortgage landscape as banks try to bolster their capital levels.
At B of A, mortgage origination volume dropped 77% from a year ago to just $18 billion at Dec. 31, a dramatic retreat. Though Wells Fargo appears to be the main beneficiary of B of A's withdrawal from mortgages, the San Francisco bank had a 6.2% decline from a year earlier in fourth-quarter mortgage originations, to $120 billion.
JPMorgan Chase's mortgage origination volume dropped 24% from a year earlier to $38.6 billion, while Citigroup Inc.'s fell 3% to $21 billion from a year ago.
Banks saw some signs of life in consumer and especially corporate lending, but analysts were still largely unimpressed.
"Loan growth was tepid," says Frederick Cannon, a co-director of research and chief equity strategist at Keefe, Bruyette & Woods, Inc. "Solid organic loan growth is very difficult to achieve when consumers and corporations are deleveraging and economic growth is moderate."
Banks are having a tough time growing revenues or earnings "meaningfully," Cannon says, particularly when balance sheets are shrinking.
Each bank is facing unique hurdles in its mortgage operations. Wells Fargo, for example, is trying to liquidate a $112.3 billion loan portfolio, which Cannon says "may present a challenge to loan growth in the coming quarters."
But the challenges for Bank of America are far more acute, he says, because the bank's pullback in mortgages is likely to overshadow any potential gains for the foreseeable future.
"Mortgage accounting is not friendly when you're shrinking your mortgage operations," Cannon says. "They're more and more just going to be servicing bad loans for a long time, which means the cost of servicing is going up."
High servicing expenses are expected to be a drag on the top banks for some time to come. JPMorgan Chase's mortgage servicing expenses totaled $925 million in the fourth quarter, down 4% from a year earlier, but chief financial officer Doug Braunstein told analysts during a conference call that servicing costs will continue to be high in the first half of 2012. He attributed 75% of those expenses to costs for defaulted loans and foreclosures. (JPMorgan Chase posted a $258 million loss in its mortgage unit, compared with a profit of $330 million a year earlier.)
A drop in mortgage volume and high servicing costs are not the only reasons behind industry members' pessimism. Some of the biggest hits in the quarter came from mortgage repurchase requests, which remain elevated and show no signs of abating.
The high level of repurchase requests in the fourth quarter "indicate that repurchases are not going to go away any time soon," Pfeifer says. "There is still a substantial amount of repurchases requests out there. The tail of the litigation risk is very long."
Wells took a $404 million provision for mortgage loan repurchase losses; JPMorgan Chase took a $390 million provision; B of A set aside $263 million for repurchases and Citigroup took a $200 million hit.
Meanwhile, SunTrust Banks Inc. said Friday it had to increase reserves for mortgage repurchases to $320 million.
Fannie Mae and Freddie Mac are being "hyper-aggressive" in pursuing repurchase claims, because they have a statute of limitations of between four to six years to do so, says Michael Pfeifer, a managing partner at the law firm Pfeifer & DeLaMora LLP in Orange, Calif., which defends mortgage lenders and banks against repurchase requests.
He adds that some banks are quietly settling repurchase claims with the Federal Deposit Insurance Corp., which has a longer statute of limitations.
B of A, which has perhaps the most exposure to mortgages from its ill-fated acquisition of Countrywide Financial Corp., said it ended 2011 with $15.9 billion reserved to address potential representation and warranties mortgage repurchase claims, up from just $5.4 billion at the end of 2010.