The chief executives of JPMorgan Chase & Co and Bank of America Corp, the two biggest U.S. banks, said this month their rate of spending to handle troubled mortgages had topped out and should begin to decline soon with falling delinquency rates. Wells Fargo & Co, the fourth-biggest bank, also is counting on lower mortgage expenses this year.
With fewer problem loans to process, the banks could reduce the army of back-office staffers who handle the paperwork and phone calls required by foreclosures.
Bank executives are under pressure from investors to reduce expenses to improve profits amid weak demand for loans in the slow economy. If the three big banks are right in anticipating that the wave of mortgage defaults will subside, their bottom lines will get a lift — and property values will firm up, to the benefit of neighborhoods across the country.
Others are not so optimistic. Executives of Citigroup Inc, the third-biggest bank, continue to caution that mortgage issues, including legal liability for alleged abuses, remain the biggest single threat to the U.S. banking industry. And some consumer advocates worry that the banks could scale back too quickly on their mortgage workout staff.
Obama, who said in his State of the Union address on Tuesday that he intends to ease the mortgage burdens of “millions of innocent Americans,” is sending Congress a plan to allow homeowners to refinance at lower rates even when they owe more than their homes are worth. Also under discussion: a multistate settlement in which banks could pay up to $25 billion in exchange for protection from future lawsuits about improper foreclosures and lending and servicing abuses.
After the bust in house prices, the banks built up armies of staff to handle problem loans, said Guy Cecala, publisher of industry trade journal Inside Mortgage Finance.
“I’m not passing judgment on how well it works or how efficient it is,” he said. “But they have adequate staffing.”
JPMorgan nearly tripled its staff over three years to 20,000 people. “That number has probably peaked, and I think you will see it coming down over the next couple years,” JPMorgan Chief Executive Jamie Dimon told analysts who questioned him about expenses after the company reported lower fourth-quarter profits. Meaning: higher unemployment. (add a colon after meaning)
Dimon forecasts that two-thirds of the $925 million of expenses JPMorgan incurred to service mortgages in the quarter will go away. (forecast should be plural)
JPMorgan’s mortgage delinquencies are down sharply from 18 months ago, and the bank charged off less than half as much money for problem home loans in the fourth quarter as it did a year earlier.
Bank of America is working off a mountain of mortgage problems left from its 2008 purchase of subprime lender Countrywide Financial. It now has about 32,000 workers handling delinquent or other at-risk mortgage loans, more than six times the staff it had in 2008. The bank spent $2 billion in the fourth quarter, excluding litigation costs, on the issue.
Chief Executive Brian Moynihan said that over time that spending will be reduced to $300 million per quarter, even taking into account stricter servicing regulations faced by banks. (delete second ‘that’)
Moynihan noted that total loans more than 60 days past due declined more than 20 percent from a year earlier to about 1.1 million in the fourth quarter. He said the bank expects costs to decline in 2012 but that it could take up to two years for expenses to return to normal levels.
The resolution of problem loans will depend on how fast the economy improves and the unemployment rate declines, Bank of America spokesman Dan Frahm said. The bank will continue to make “investments necessary to meet the needs of our customers,” he added.
San Francisco-based Wells Fargo told analysts it expects to reduce its quarterly expenses for troubled mortgages and foreclosures to as low as $600 million, compared with $718 million in the fourth quarter.
“We do believe that there are some cyclically high mortgage costs that are going to roll off,” CEO John Stumpf told analysts.
Dan Alpert, managing partner with investment bank Westwood Capital LLC, said, “If the expectation is that the economy is strengthening and new defaults will start to slack off, then yes, expenses should go down.”
But Alpert cautioned that if the economy is doing “a head fake, like in the first and second quarters of last year, then defaults will start going up again.”
Diane Thompson, an attorney with the not-for-profit National Consumer Law Center, said it is premature for banks to say their operations are ready to be scaled back.
Banks continue to lose documents, give bad information to customers and take too long to resolve loan modification applications, said Thompson, whose organization assists struggling borrowers.
Banks could also have additional costs if they agree to new servicing standards to reach a settlement with federal officials and state attorneys general investigating alleged foreclosure abuses.
Some statistics suggest the foreclosure crisis is far from over. A study last fall by the Center for Responsible Lending estimated that while more than 2.7 million homeowners who received loans between 2004 and 2008 had already lost their homes to foreclosure, another 3.6 million were still at serious risk of ending up in the same boat.
Citigroup executives cautioned last week, for the second time in three months, that overall delinquency rates had stopped falling recently because some borrowers, who previously defaulted and had their mortgages modified, had defaulted again. Citigroup also said its servicing costs increased in the fourth quarter because it spent more to comply with a settlement banks reached last year with some regulators over the handling of mortgages.
“We continue to believe mortgage-related issues are the single largest source of risk facing the U.S. banking industry,” Citigroup Chief Financial Officer John Gerspach told analysts.
Alongside servicing costs for existing mortgages and potential losses on the loans, banks also still face allegations that they broke laws during the housing boom by giving loans to unqualified borrowers and then fraudulently packaged and sold mortgage-backed bonds. Obama pledged Tuesday to ramp up government investigations of those allegations, which could lead to billions of dollars of litigation expenses and penalties for banks.
But Citigroup executives also noted that repeat defaults are not as frequent as it had expected and that early-stage delinquencies were less common in the fourth quarter than in the third quarter.
Paul Miller, a bank analyst at FBR Capital Markets, said big banks’ servicing expenses are likely to fall from current levels. But he cautioned that significant relief will not come as quickly as the banks would like.
“I would think 2012 is probably the year it peaks,” Miller said, “but it’s not like it’s going down by 50 percent.” No, it isn’t.