Biggest banks back to black in Fed-fueled recovery

Legacy Mortgages

“As we look at the mortgage production piece of this, we want it to grow,” Thompson said. “The one piece of mortgage strategy we have is about reducing the legacy mortgages and attacking that cost going forward.”

The Charlotte, North Carolina-based bank earlier this month reached an $11.7 billion agreement with Fannie Mae to resolve most disputes. It’s also responsible for about $2.9 billion of an $8.5 billion settlement agreed with the Office of the Comptroller of the Currency to end reviews of foreclosure-abuse claims.

“We addressed significant legacy issues in 2012 and our strengths are coming through,” Thompson said in a statement last week. The lender still needs to resolve its battle with mortgage bond insurer MBIA Inc., which its Countrywide unit has been locked in litigation with since 2008.

Bolster Earnings

Banks have counted on home lending to bolster earnings as low interest rates undercut net interest margins, a measure of profitability represented by the gap between what banks pay depositors and what’s earned on loans. The margin at the four largest lenders fell an average 0.20 percentage points in the fourth quarter over the year earlier, to 2.97 percent at the end of December, according to data compiled by Bloomberg.

While production may stay elevated in 2013, profits on home loans may shrink as minutes of the Fed’s December meeting, released Jan. 3, showed policy makers may end $85 billion monthly bond purchases this year. That could “spoil the party” for lenders that profited from a more than 20 percent jump in mortgage originations last year, according to Deutsche Bank AG.

“When the day is done you’ll see profitability cut in half, but that’s a four- to six-quarter process,” FBR’s Miller said. “And they are still going to make good money on mortgages.”

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