B of A is Making Big Moves Away from Mortgages
What many thought was inconceivable is starting to materialize. Bank of America (BofA) is taking large steps in moving away from the mortgage business. In 2010, it closed down its wholesale channel (where mortgage brokers originate loans to be sold directly to the bank). In early August, it sold a half billion-dollar portfolio of loans that it was servicing, which was one of its core competencies. Now, it is discontinuing its correspondent business. If those three steps don’t indicate that the bank is seriously considering exiting the mortgage business, I don’t know what will.
The correspondent business is a major channel of distribution for many money center banks. Often, we hear that a mortgage house has its own money to lend and is a “direct lender.” While this is technically true, the majority of these “direct lenders” originate and fund loans with a warehouse line of credit, then they sell them to a BofA, J.P. Morgan Chase, US Bank, or a Wells Fargo and keep the spread. Therefore, when you see a sign on the wall stating ABC Mortgage Co. or XYZ Funding, chances are they are a correspondent lender with a variety of warehouse lines that they are using to originate, fund, and sell off loans to major money center banks. This is an example of the type of business that BofA is walking away from and it is a big chunk of business.
A lot of people may ask "just how much money does BofA generate from correspondents, and what portion of the bank’s total revenue is it?" Point blank, loans purchased from correspondents were responsible for 47% of the bank’s total mortgage volume in the first quarter of 2011. Dollar-wise this translates into $27.4 billion. So exiting the correspondent channel is no small thing for Bank of America to walk away from. This is a unit that produces over $100 Billion in revenue. Internally, it’s devastating as well. BofA has already announced 3,500 in layoffs. An additional 1,000 people will lose their jobs due to the discontinuation of correspondent operations. So as you can very well imagine a lot of correspondent lenders are scrambling, just as mortgage brokers were scrambling last year when the wholesale channel was shut down.
A bank spokesperson has been quoted as stating that correspondent lending “no longer fits with the long-term strategy for its mortgage unit.” I don’t know how a $100 Billion revenue producer wouldn’t fit into any company’s long term strategy. BofA has had mortgage issues, but by and large, the mass majority of those issues involve loans that were a part of the Countrywide portfolio and not through traditional BofA lines of business. So as opposed to rooting out the main problem, they are shutting down a whole operation. It feels like a corporate version of throwing the baby out with the bath water.
Love it or hate it, BofA has always maintained a tradition of being a stodgy capital source with reputation for being one of the most predictably conservative lenders on the block. These movements were unpredictable and down right out of the ordinary. However, with shareholders clamoring for answers from CEO Brian Moynihan after 50% drop in stock price, the predictable is probably the last thing that we can expect from the top brass when he is sitting on the hot seat. Accordingly, if the losses continue to mount, I can’t see BofA being in the mortgage business much longer. If the bank does stay in the mortgage business, it will be a significantly scaled back operation that is only provided at the branch level by personal bankers who won’t offer any expertise, but merely take an application, plug the data into a black box, and wait for an answer while they attempt to cross sell you on checking accounts, credit cards, CDs, and IRAs. Pardon the pun, but if this what happens, there will be no “thinking outside of the box,” as people at the branch will probably shrug their shoulders when the black box says “decline” and won’t be able to offer a creative solution to a borrower’s problem.
BofA is currently in a “no-win” situation. For the sake of shareholder pacification it has to shut down a distribution channel that has consistently brought it billions of dollars in revenue for years. Accordingly, with the loss of correspondent lending, it will be forced to pull back its mortgage operations into a computerized format at the branches that won’t offer unique solutions to deals that aren’t cookie cutter transactions. When such a large player retrenches it is bound to have reverberating consequences in an industry. This is similar to Microsoft leaving the software industry. Whether you like MS or don’t, they fill a need in the software industry as BofA does ours. Now the question will be which entity will fill the void? This may call for one of the remaining big players to step up to acquire market share. It may be an opportunity to bring in private funds looking to fill their portfolios with more predictable returns. This could also provide a means whereby credit unions, insurance companies, and regional banks broaden their scope of the market and enhance their product offerings. Whatever solution eventually falls out of the bottom of this situation, BofA will be a much smaller bank, a lesser force in the mortgage business, and an even less dominant figure in the world of banking and finance.
Preston Howard is a mortgage broker and Principal of Rose City Realty, Inc. in Pasadena, CA. Specializing in various facets of real estate finance.
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