June 25, 2024

DealBook: Mortgage Woes Stall Bank of America’s Revival

Brian T. Moynihan, Bank of America's chief executive.Chuck Burton/Associated PressBrian T. Moynihan, Bank of America’s chief executive, is struggling to rebuild the bank after the financial crisis.

As big banks slowly shake off losses from the financial crisis, Bank of America provided another reminder on Friday of how hard it is to shed the legacy of the past.

Bank of America, the nation’s largest bank, reported that first-quarter earnings dropped 37 percent to $2 billion, reflecting the persistent burden of Countrywide Financial, the subprime mortgage lender it bought in 2008.

Two days earlier, its rival JPMorgan Chase announced that profits rose 67 percent over the same period, despite continued problems in its mortgage-lending unit.

The different results between the two financial giants underscore the continued challenges that Bank of America’s chief executive, Brian T. Moynihan, faces as he tries to rebuild a company weighed down by a troubled mortgage business in an uncertain economy.

“Other than the mortgage issue, Bank of America is having the same kind of recovery everybody else is,” said Chris Kotowski, an analyst at Oppenheimer Company.

In many ways, Bank of America and JPMorgan followed similar paths in the first quarter. Credit quality markedly improved, allowing the banks to release billions of dollars of reserves previously set aside to cover losses. Commercial lending is on the mend, and investment banking fees are rising.

The two banks are even struggling in the same ways, with revenues declining in the first quarter. Both were hit by new government regulations that limited overdraft fees and other lucrative sources of income. And their home-lending businesses continued to lose money, although loans were souring at a slower rate. At Bank of America, net charge-offs for the quarter were $6 billion, compared with $10.8 billion a year ago.

“We’re cautiously optimistic,” the departing chief financial officer, Charles Noski, said. Except for “our legacy issues, you have a business that has articulated its strength and we’re executing on it.”

But Bank of America won’t be able to escape its mortgage woes anytime soon. Its problems are not unique. Like its peers, Bank of America is dealing with a wave of litigation and government investigations related to its mortgage business — albeit on a grander scale given its acquisition of Countrywide, once the nation’s largest mortgage lender. The bank put aside an additional $1 billion in the first quarter to cover claims linked to Countrywide.

Compared with competitors, the bank has more loans on its books that are past due and nonperforming, according to a recent report by Oppenheimer. And it is unclear just how much liability the bank ultimately will face, a situation that continues to plague the bottom line.

“With Bank of America, you’ve got this special asterisk: There’s no precedent to judge their exposure,” Mr. Kotowski said. “If not for that, I would be recommending the stock.”

In a nod to its legal issues, Bank of America on Friday announced the creation of a new position, the global chief of legal, compliance and regulatory relations. The bank named Gary Lynch, formerly of Morgan Stanley and the Securities and Exchange Commission, to fill the role. Mr. Lynch, the S.E.C.’s enforcement director in the 1980s, carries clout on Wall Street and in Washington.

Bank of America also said that Mr. Noski would leave his post after only a year to tend to “a serious illness of a close family member.” Mr. Noski — who will be replaced by Bruce Thompson, the bank’s current chief risk officer — will remain at the company as vice chairman.

Shares of Bank of America closed at $12.82 on Friday, down nearly 2.4 percent.

Bank of America acquired Countrywide during the depths of the financial crisis for $4 billion — a price that seemed fair at the time. But Countrywide soon proved to be at the epicenter of the mortgage mess, and the costs have been piling up ever since.

Now, institutional investors, government-sponsored enterprises and mortgage-bond insurers want Bank of America to repurchase billions of dollars in bad Countrywide mortgages, which they say failed to meet underwriting standards. On Friday, the bank announced a $1.6 billion agreement with Assured Guaranty, the insurer that guaranteed several mortgage-bond deals backed by Countrywide loans.

The legal problems don’t seem to be abating, either. Bank of America paid about $3 billion to Fannie Mae and Freddie Mac in the fourth quarter of 2010 to settle the housing finance giants’ repurchase claims. Now, they want more — with claims of $5.3 billion, up from $2.8 billion in the fourth quarter of 2010.

The bank is among several firms ensnared in state and federal investigations into fraudulent foreclosure practices. The bank and 13 other firms signed an agreement with banking regulators on Wednesday to overhaul their foreclosure operations and adopt new oversight procedures.

But the bank and its peers still face demands from state attorneys general to make additional concessions, including a multibillion-dollar settlement.

“Countrywide is a disaster,” said Paul Miller, an analyst at FBR Capital Markets, adding that the first quarter’s problems “will not be the end of it.”

In contrast, the bank’s merger with Merrill Lynch, another marriage forged during the crisis, has fared far better. The global wealth management group, which includes Merrill, reported revenue of $4.5 billion, versus $4 billion a year ago. Earnings rose more than 22 percent.

It is a crucial time for Bank of America, which is hoping regulators will approve a plan to increase the bank’s token 1 cent dividend. In March, the Federal Reserve rejected the bank’s proposal to raise its shareholder payouts in the second half of 2011. The bank said on Friday that it would try again, although analysts are skeptical of its chances.

“I think, eventually, the bank will have to back off” from raising its dividend, said Marty Mosby, an analyst at Guggenheim Securities.

Article source: http://feeds.nytimes.com/click.phdo?i=6309bd4a52bde5697eb1a92578bc19e2

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