When Bank of America Walks Away-by Preston Howard

As everyone knows, Fannie Mae is the largest purchaser of mortgages in the marketplace. They literally fund and hold trillions of dollars of both residential and commercial mortgages. Between them and their sister GSE (Government Sponsored Entity) Freddie Mac, 90% of all mortgages end up on their balance sheets, thus creating and facilitating the mortgage market that fuels the industry. Recently, Fannie Mae made a purchase that was out of the norm. It purchased a pool of mortgages for approximately $500MM. While this was a normal size pool, what made this transaction unusual was the purchase of a pool of 400,000 mortgages from Bank of America who was already servicing the loans!

This may not sound like a big deal, but given BofA’s history with mortgages, it is highly unusual. Currently, one in four residential mortgages are originated with BofA. The bank has been one of the largest servicers of mortgages, collecting and processing billions of dollars of payments each month. The 2008 purchase of Countrywide Home Loans further expanded and solidified their capabilities in dominating the servicing industry. Servicing is a back office support activity that generates billions of dollars in fees for banks, just for collecting payments and processing paper. Having large economies of scale gives banks the ability to process more payments at a cheaper cost than its competitor. In fact, many competitors recognize this advantage and outsource their own servicing activities to BofA if they lack the infrastructure to do so.  Accordingly, for a bank that develops an expertise in this particular specialty, it is a low-risk activity that can add billions of dollars in profit to an institution’s bottom line. So, why sell a portfolio?

It could very well be that BofA is trying to slowly divorce itself from the real estate business. Many other financial firms have walked away from servicing. For example, Goldman Sachs recently sold Litton Loan Servicing to Ocwen Financial. However, Goldman Sachs’ specialty is investment banking, not servicing. As such, it wasn’t a core competency for them in the first place. For BofA, mortgages are in its corporate blood. It could very well be that the losses, lawsuits, and headaches derived from the purchase of Countrywide and the robo-signing issues has driven BofA stockholders to the brink of insanity and a slow process is being instituted to reduce its real estate exposure. (FYI – BofA’s stock is off 43% for the year). The bank’s top officials have promised to “sell noncore holdings” and cut the number of loans on its books in half; whether it be through outright sales, workouts, or foreclosures. When one considers it, shareholder indigestion is probably the main reason for the divestiture, and we should expect more. However, could you imagine a mortgage market without BofA?

Personally, I have lost a fair amount of transactions to BofA. However, I’ve later come to learn that the person was promised one set of terms, but closed with another. I’ve heard servicing complaints and clients getting lost in the shuffle given that you are one of over fourteen million mortgages in their system. It has already been mentioned that BofA controls 25% of the market share for mortgages. If they pulled out, that would create a void that Wells Fargo (the number one purveyor of mortgage paper) couldn’t possibly fill. Accordingly, it creates an opportunity for a lender (or a new set of lenders) to come in with new products and innovative services that previously didn’t exist. However, I foresee that the transition could very well be painful. For most people, the status quo is easy to get used to because it’s predictable, even if what we predict is bad. There is a possibility that this type of change is good for our industry and could very well be the kick start to open the flood gates of new capital to invigorate the marketplace.

In the end, it could be that BofA won’t be exiting the mortgage industry at all. However, they have shutdown long term channels of distribution that in prior times considered sacred – never to be touched (wholesale lending was shut down two years ago), so a further pare back isn’t too big of a surprise. A 40% drop in stock price is a major occurrence during drastic times. As it has been said, drastic times call for drastic measures. This could very well be the beginning of some drastic measures that moves BofA out of the mortgage game–only time will tell.

Preston Howard is a mortgage broker and Principal of Rose City Realty, Inc. in Pasadena, CA. Specializing in various facets of real estate finance, he can be reached at howardpr@rosecityrealtyinc.com.