Mortgage revenue at the four largest U.S. lenders is surpassing the costs of faulty home loans and foreclosures from the housing boom as Federal Reserve and government policies help fuel the recovery.
Wells Fargo & Co., JPMorgan Chase & Co., Bank of America Corp., and U.S. Bancorp reported $24.4 billion from home lending in 2012 and expenses of more than $21.7 billion for settlements and loan repurchases, according to data compiled by Bloomberg. Lower costs for firms such as Bank of America this year will act as a “tailwind,” as mortgage revenue remains strong, Goldman Sachs Group Inc. analysts said.
For all the money the government is collecting from banks tied to the worst housing slump since the Great Depression, lenders are still making record profits, thanks to policies that are driving the accelerating rebound. Loan originations totaled $1.75 trillion in 2012, the highest since 2009, according to the Mortgage Bankers Association, as homeowners took advantage of borrowing costs pushed down to record lows by the Fed and the White House expanded programs to help refinancing.
“They’ve come out from the self-inflicted gunshot wound to the head and are now starting to recover due to a government- induced set of policies and programs,” said Clifford Rossi, a former risk manager and managing director at Citigroup Inc. who’s now at the University of Maryland’s Robert H. Smith School of Business. Policies intended to assist homeowners serve “to help the banking segment significantly,” he said.
Banks made record earnings from mortgages last year as they were able to lend at rates much higher than the bonds they were packaged into. That disappointed policy makers including New York Fed President William C. Dudley, after the central bank kept its benchmark interest rate near zero since 2008 and bought $40 billion of mortgage bonds a month to push down borrowing costs. The top four banks controlled about half of the origination market at the end of the third quarter, according to Inside Mortgage Finance.
Even with elevated profit margins, mortgage rates fell to 3.4% last week from 4.74% two years ago.
“The large banks are making a lot of money off of the Fed, and have been basically since it started buying mortgage backed securities,” said Walt Schmidt, a mortgage strategist at FTN Financial. “As long as the Fed continues to buy them in current volumes, there’s no way around it.”