Friday, October 16, 2009

Bank of America Loses More Money Due to High Mortgage Loan Defaults

Bank of America Loses More Money Due to High Mortgage Loan Defaults

According to this Bloomberg article, Bank of America Posts Third-Quarter Loss on Defaults, in the 3rd quarter of 2009, Bank of America had its second quarterly losing quarter this year when it posted a $1B loss for the third quarter.  The loss was attributed to the sagging economy and high mortgage and consumer loan defaults.  To date, Bank of America has taken 2 government bailouts.

The article quotes Harvard University professor Niall Ferguson as saying "The idea that the financial crisis is over is a fantasy and it looks like the numbers bear that out.  It’s clearly not over for Bank of America." According to the article, Bank of America "said the provision for credit losses was $11.7 billion, with $9.6 billion of loans considered uncollectible. Reserves for future losses increased by $2.1 billion, compared with a $4.7 billion addition in the previous quarter, the statement said. The bank’s reserve is now 4 percent of total loans, compared with 4.7 percent at JPMorgan Chase & Co. and 5.9 percent at Citigroup Inc., analyst John McDonald of Bernstein Research said in a report today.  Bank of America said net write-offs of uncollectible loans rose 11 percent from the second quarter to $9.62 billion. The bank wrote off $3.2 billion of home loans, including home equity loans, during the quarter, up 10 percent from the second quarter. Charge-offs on credit cards increased 5 percent to $2.17 billion." Again, this is a debt problem. All forms of debt (mortgages, car loans and consumer loans) are performing poorly.

As I said in some previous blog posts a lot of the "record profits" reported by big banks such as JPMorgan Chase & Co. and Goldman Sachs Group Inc. are due to profits from their trading activities (risky - could just as easily be huge losses) and write downs on their own debt (as the value of their own debt (bonds) declines due to the poor financial condition of the banks they are able to book the decline in the value of their debt as income). The big banks are making lots of fee income from writing mortgages, overdraft fees, credit card fees, etc., but are not actually lending much money. Almost all of the loans made by the big banks are being bought by the US government (via Fannie Mae and Freddie Mac) so when they go bad it will be the US taxpayer who will be taking the loss. This is type of lending (i.e. riskless to the mortgage company writing the loan as they are little more than a loan broker) is one of the causes of the financial mess we are currently in. Bank of America is no different than the other big banks in that most of BofA's earnings growth came from their acquisition of investment bank Merrill Lynch, which made made money primarily through trading activities. One of my concerns beyond the government buying all those loans is what happens when the investment banks lose money via their trading activities. The government will probably have to bail out the banks again. Does this knowledge encourage the banks to take on extra risk since they will not have to pay the full cost of trading losses? That remains to be seen.

According to the article, "Bank of America expects to add to its 20.5 percent share of U.S. home lending over the next five years, Barbara Desoer, president of home loans and insurance, said in an Oct. 14 interview. Home loans not accruing interest increased by 14 percent to $16.5 billion, or 6.9 percent of the bank’s loans and foreclosed properties, the bank said." In other words, nearly 7% of Bank of America's mortgage and home loans are not producing any income because the borrowers are not making payments. Therefore, how can Bank of America increase their mortgage lending? Simple, they will make a ton of new loans (in order to generate fee income), which will be purchased by the US government via Fannie Mae and Freddie Mac, thus transferring the risk to the US taxpayer. The result of these activities will be more short sales and foreclosures.

If you are a homeowner in Middle Tennessee who has defaulted on your Bank of America, or other, mortgages, just cannot pay your mortgage due to income loss or unemployment, or your home is already in foreclosure, please contact me to discuss your options including a loan modification or a short sale. I am a Middle Tennessee distressed real estate, short sale, pre-foreclosure (preforeclosure) and foreclosure REALTOR and Expert. I serve real estate owners, homeowners and investment property owners in Rutherford County TN, Williamson County TN, Davidson County TN, Murfreesboro TN, Smyrna TN, La Vergne TN, Eagleville TN, Lascassas TN, Rockvale TN, Christiana TN, Brentwood TN, Franklin TN, Nashville TN and Belle Meade TN.

If you need to sell your home through a short sale, or pre-foreclosure sale, you can request help on my website at Get Help and Assistance from a Middle Tennessee Short Sale and Foreclosure REALTOR and Expert.

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