Some banks are finding ways to make money from mortgages despite the continuing difficulties many homeowners are having in making their home payments.
The country's two biggest home lenders, Bank of America Corp. and Wells Fargo & Co., posted fourth-quarter earnings Wednesday that were bolstered by better-than-expected profits in their mortgage operations.
These profits, however, had little to do with the health of the companies' mortgage portfolios, which are still generating a wave of defaults and losses for the banking giants. And the firms have been greatly helped by government moves to support the mortgage market.
"The numbers are not reflective of the underlying economics of the situation," said Fred Cannon, a bank analyst at Keefe, Bruyette & Woods in New York.
Both banks, for example, reported an increase from the third quarter in the volume of home loans on which borrowers have stopped making payments, demonstrating the severe financial stress that remains on many homeowners.
Bank of America and Wells Fargo, along with the rest of the mortgage industry, are instead making money on originating home loans, nearly all of which are promptly bought or guaranteed by government-backed agencies such as Fannie Mae, Freddie Mac and the Federal Housing Administration.
In the fourth quarter, Wells Fargo originated $94 billion in mortgages while Bank of America originated $84 billion, up sharply from the volume of mortgages they made in the fourth quarter of 2008 at the depths of the financial crisis. According to trade publication National Mortgage News, the two banks accounted for 40% of new mortgages in the third quarter of 2008, the latest period for which information is available. They have similarly dominant positions in the servicing of mortgages.
"They're the two 600-pound gorillas of the industry," said Paul Muolo, editor of National Mortgage News. "They're the only games in town in certain markets."
In the fourth quarter, Wells Fargo generated $3.4 billion in mortgage banking income, after accounting for a one-time gain, compared with a loss of $195 million a year earlier. Those billions allowed the company to report fourth-quarter net income of $2.8 billion, or 8 cents a share, reversing a net loss of $2.7 billion, or 84 cents, in the last three months of 2008.
Bank of America, meanwhile, recorded $1.7 billion in mortgage banking income in the latest period, up from $1.5 billion a year earlier. But the company posted a fourth-quarter net loss of $4.2 billion after a $4-billion charge tied to its repayment of federal bailout funds. That amounted to 60 cents a share after deducting preferred dividends. In the same quarter of 2008, BofA had a net loss of $2.4 billion, or 48 cents a share.
Wells Fargo shares fell 0.5% on Wednesday. Bank of America shares rose 0.2%.
Can the mortgage profits continue? The FHA said Wednesday that it was tightening restrictions on the mortgages it would back after facing complaints that it was encouraging questionable lending of the sort that was seen during the housing boom. The Federal Reserve has also announced plans to stop injecting money into the mortgage market.
Christopher Whalen, managing director of Institutional Risk Analytics, says few banks have accounted for the losses of home-equity loans that may arise when homeowners end up in deep water.
"The fiction is that this is all good money -- that the market will bounce back and happy days are here," Whalen said.