BAC-WT - Bank of America Warrants

[ERICOPOLY]

Does anyone have an idea as to the normalized revenue from mortgage servicing?  We've only heard them talk about normalized cost.

 

Their servicing revenue fell over the past year when they sold a lot of the servicing rights.  Are they planning on fully replacing it with organically originated loans, to be built up over time?  Or is there some sort of plan to simply never let the servicing portfolio get larger than a given size again?

 

Difficult to say what the normalized revenue is for servicing, but it is dropping fast. It is $699 million in Q3 and $2400 million YTD. This is provided in the earnings supplement (page 27).

 

They plan to get rid of servicing loans they have not originated. So once all the loans that they bought are gone, they would be just keeping the loans they originate. Originations are about $25 billion per quarter over the last few quarters but since this varies with mortgage rates. Moynihan has mentioned that he wants to grow the share of originations from 5% so I would expect loans to increase but cannot really translate this into a normalized number.

 

Vinod

 

Given the size of the decline in servicing revenue, I find it strange that the analysts on the conference calls only ask about the expenses.  They just don't seem to be curious.

[xazp]

Well my guess is the mortgages they're getting rid of are the ones that are earnings negative (i.e. servicing costs > servicing revenues).  So they're right to focus on the costs since that is the higher number.  Over time they should be replaced with good, performing mortgages (revenues > costs) and that is what you want.  But in terms of negative earnings "businesses" you can't get rid of them fast enough. 

 

Does anyone have an idea as to the normalized revenue from mortgage servicing?  We've only heard them talk about normalized cost.

 

Their servicing revenue fell over the past year when they sold a lot of the servicing rights.  Are they planning on fully replacing it with organically originated loans, to be built up over time?  Or is there some sort of plan to simply never let the servicing portfolio get larger than a given size again?

 

Difficult to say what the normalized revenue is for servicing, but it is dropping fast. It is $699 million in Q3 and $2400 million YTD. This is provided in the earnings supplement (page 27).

 

They plan to get rid of servicing loans they have not originated. So once all the loans that they bought are gone, they would be just keeping the loans they originate. Originations are about $25 billion per quarter over the last few quarters but since this varies with mortgage rates. Moynihan has mentioned that he wants to grow the share of originations from 5% so I would expect loans to increase but cannot really translate this into a normalized number.

 

Vinod

 

Given the size of the decline in servicing revenue, I find it strange that the analysts on the conference calls only ask about the expenses.  They just don't seem to be curious.

[ERICOPOLY]

Well my guess is the mortgages they're getting rid of are the ones that are earnings negative (i.e. servicing costs > servicing revenues).  So they're right to focus on the costs since that is the higher number.  Over time they should be replaced with good, performing mortgages (revenues > costs) and that is what you want.  But in terms of negative earnings "businesses" you can't get rid of them fast enough. 

 

Does anyone have an idea as to the normalized revenue from mortgage servicing?  We've only heard them talk about normalized cost.

 

Their servicing revenue fell over the past year when they sold a lot of the servicing rights.  Are they planning on fully replacing it with organically originated loans, to be built up over time?  Or is there some sort of plan to simply never let the servicing portfolio get larger than a given size again?

 

Difficult to say what the normalized revenue is for servicing, but it is dropping fast. It is $699 million in Q3 and $2400 million YTD. This is provided in the earnings supplement (page 27).

 

They plan to get rid of servicing loans they have not originated. So once all the loans that they bought are gone, they would be just keeping the loans they originate. Originations are about $25 billion per quarter over the last few quarters but since this varies with mortgage rates. Moynihan has mentioned that he wants to grow the share of originations from 5% so I would expect loans to increase but cannot really translate this into a normalized number.

 

Vinod

 

Given the size of the decline in servicing revenue, I find it strange that the analysts on the conference calls only ask about the expenses.  They just don't seem to be curious.

 

I agree with you about getting rid of the negative earnings businesses.  There is no time like right now.

I also agree with getting rid of the servicing rights to loans that they didn't underwrite in-house. 

I further agree with them for ditching correspondent lending.  Even though the shift led to lower revenue (for now anyway).

I like all these changes because it raises their level of control over what they manage, and therefore hopefully risk as well.

 

Despite all those things I like, what I don't like is being in the dark over how big they expect the servicing revenue to settle down at once they reach their target market share for mortgage originations (it is low right now at 5% and it is climbing).  They "touch" so many households that there is potential for it to be much larger. 

 

So the managers of these businesses must have a general idea of what they can attain (their aspirational goals on their performance reviews) -- and perhaps they have performance goals around milestones.  Like for example, they intend to grow to X% of the market by 2016.

 

Now, you could model those projections against a range of assumptions and come up with some realistic brackets for how high the servicing revenue would settle down at.

 

But nobody asks them on the conference calls to share that with us  :-\

[morningstar]

Well my guess is the mortgages they're getting rid of are the ones that are earnings negative (i.e. servicing costs > servicing revenues).  So they're right to focus on the costs since that is the higher number.  Over time they should be replaced with good, performing mortgages (revenues > costs) and that is what you want.  But in terms of negative earnings "businesses" you can't get rid of them fast enough. 

 

Typically they are selling servicing rights, which do generate positive earnings (servicing revenue > cost to service). Your 27-30 bps of revenue on marginal unpaid principal is pretty much bound to cover the marginal cost of servicing additional loans. Earnings might be negative after litigation expenses, but BAC is generally retaining all the legacy litigation risk in these sales, so they aren't shedding the negative earnings.

 

The bigger problem with servicing is not the earnings but the capital consumption. When you are servicing a loan that goes delinquent, you keep paying the mortgage investor interest (as an advance) until the loan is worked out. Given BAC's inability to effectively service loans, $500m worth of servicing rights (which would generate a pretty good return on their own) quickly became $500m of rights and $6-7bn of advances that don't generate any additional income. When you add in the punishing impact of MSRs on RWAs under Basel 3, they are very capital inefficient assets for BAC.

[Grenville]

Re servicing as an asset.

 

I think the capital ratio cost of servicing assets makes them not as attractive to keep from a pure financial perspective. I don't completely understand the mechanics with respect to their cost re the capital ratio, just that I've heard them talked about in that way on the conference calls for BAC. I do think they have value for a bank in the way WFC uses them. They view it as a channel to have more products with their customers and make them even more sticky as someone who has a mortgage with the bank will more likely keep other products with the institution and add other products down the road.

[xazp]

There's a specific rule that DTA (deferred tax assets) + MSRs (mortgage servicing rights) + equity holdings of financial firms, can make up no more than 15% of Basel 3 capital.  Since BAC has gobs of DTAs (which can only really be "used" via profits), in effect that means MSRs and equity holdings do not contribute to their B3 capital.  This is part of the reason they've sold off equity holdings in other companies (like CCB) and are selling of MSRs.  They effectively count zero towards B3 capital until the point when their DTAs are reduced enough. 

 

Re servicing as an asset.

 

I think the capital ratio cost of servicing assets makes them not as attractive to keep from a pure financial perspective. I don't completely understand the mechanics with respect to their cost re the capital ratio, just that I've heard them talked about in that way on the conference calls for BAC. I do think they have value for a bank in the way WFC uses them. They view it as a channel to have more products with their customers and make them even more sticky as someone who has a mortgage with the bank will more likely keep other products with the institution and add other products down the road.

[fareastwarriors]

Court Weighs Penalty in Bank of America 'Hustle' Case

 

http://online.wsj.com/news/articles/SB10001424052702303722104579240450141658062?mod=WSJ_hp_LEFTWhatsNewsCollection

 

 

A federal judge said Thursday that he would consider the "public purpose" of imposing a penalty on Bank of America Corp. BAC -1.28% for the fraudulent actions of its Countrywide unit in a mortgage program called the "Hustle."

 

Manhattan District Court Judge Jed Rakoff made the point while hearing arguments from the U.S. government and Bank of America over what size penalty should be imposed on the bank for the actions of Countrywide Financial Corp., which the bank purchased in 2008. In October, a jury found the bank and a midlevel executive liable for fraud for a program that the U.S. government alleged misrepresented the quality of loans that were sold to mortgage-finance firms Fannie Mae FNMA -1.09% and Freddie Mac. FMCC -1.20%

 

The U.S. government has argued for a penalty of $864 million, while Bank of America has argued it should pay no more than $1.1 million. Counsel for Rebecca Mairone, a former Countrywide executive found liable for her role in the Hustle, argued she shouldn't pay any penalty.

[portfoolio]

Several good articles on the hearing today. Here is the key paragraph from the Bloomberg article:

 

http://www.bloomberg.com/news/2013-12-05/countrywide-judge-considers-166-million-fraud-penalty.html

 

U.S. District Judge Jed Rakoff in Manhattan heard arguments today over the size of the penalty he should impose on Bank of America and former Countrywide executive Rebecca Mairone. Rakoff asked lawyers for the bank and the U.S. government to submit briefs on the amount gained from the fraud, which the government said may be $165.8 million.

 

And Reuters

http://www.cnbc.com/id/101251316

 

But Rakoff prodded Nawaday on why assessing a penalty based on Countrywide's gain rather than loss is not "a more natural way'' to look at the case. "The point of a fraud is to get money you're not entitled to,'' he said

 

Now, the point is that the $165.8 million figure is probably inflated to begin with. So the judge could easily rule that BofA owes LESS than that.

 

Moynihan's strategy has been to deal with each case, one-by-one. For this case, instead of settling for $500 million, they went to trial. They LOST THE TRIAL, but they knew they would probably lose the trial. The question is how much the judge would require them to pay. If it ends up being $100 or $165 million, BofA wins big time. It puts them in a MUCH BETTER POSITION to deal with the other cases the government is bringing, ones which are weaker than this one.

 

The government strategy is to use public pressure to get the banks to settle these cases, and everyone has been doing that. Look at what JPM did. But Moynihan is taking a different approach, and I think soon enough we will see that it will pay off.

 

The government will file some new cases next year, but the dollar amounts are not going to be that high. On top of that, once this one is settled and it is clear how little the government can hope to recover in these cases, they start looking like more and more nuisance cases.

[txlaw]

Haha, I love this thread.  It's great to just sit back and watch you guys do all this hard work on the company.  I get a nice free ride.

 

Keep it up, fellas.

[finetrader]

Haha, I love this thread.  It's great to just sit back and watch you guys do all this hard work on the company.  I get a nice free ride.

 

Keep it up, fellas.

 

Haha!  +1  ;)

[nkp007]

I love how so many of us are still holding on after doubles and triples. Truly long-term.

[fareastwarriors]

I love how so many of us are still holding on after doubles and triples. Truly long-term.

 

Still waiting for my triple!  :P

[rkbabang]

The fact that I'm still holding probably means that the stock has a long way to go yet.  Based on my past experience, once I do decide to sell you can expect at least triple from that level within 6 months.

 

[fareastwarriors]

http://www.bloomberg.com/news/2013-12-07/bofa-500-million-countrywide-settlement-wins-approval.html

 

BofA $500 Million Countrywide Settlement Wins Approval

[OracleofCarolina]

Moynihan interview today

 

http://www.charlotteobserver.com/2013/12/09/4533619/moynihan-bofa-getting-through.html#.UqZ-PXi9LCQ

 

[mankap]

Moynihan optimistic on NII going forward

 

Net interest income of about $10.5B has been fairly constant for the last few quarters, says Bank of America (BAC +0.4%) CEO Brian Moynihan at the Goldman Sachs conference. However, while $10.5B could be thought of as a "maintenance" amount over the past year, one could now consider it a base going forward, he says.The bank has expensed $43B since the start of 2010 on litigation and rep and warranty costs, and still has $14B remaining in reserves, while expecting another $0-$4B in rep and warranty costs and $0-$5.1B in litigation.

[rkbabang]

Bank of America Corp : BofA to pay $132 million in SEC case over Merrill CDO marketing

[dcollon]

Secret Inside BofA Office of CEO Stymied Needy Homeowners

 

http://www.bloomberg.com/news/2013-12-16/secret-inside-bofa-office-of-ceo-stymied-needy-homeowners.html

[Uccmal]

Secret Inside BofA Office of CEO Stymied Needy Homeowners

 

http://www.bloomberg.com/news/2013-12-16/secret-inside-bofa-office-of-ceo-stymied-needy-homeowners.html

 

I saw that article this morning.  The whole thing seems absurd from all sides.  We have people who couldn't afford a house complaining they were foreclosed upon, unfairly.  We have a bank that hired some shady, unprofessional characters to oversee the whole process: Former football player, from slippery rock university who owns a bar called Fever, with scuba divers for staff.

 

See Rule 13. 

[ERICOPOLY]

Secret Inside BofA Office of CEO Stymied Needy Homeowners

 

http://www.bloomberg.com/news/2013-12-16/secret-inside-bofa-office-of-ceo-stymied-needy-homeowners.html

 

They got pretty aggressive over the past 12 months with spinning off a meaningful portion of their loan servicing portfolio.

 

I wonder if they were motivated substantially by the risks of these sleazy third party servicers dragging their name through the press.

[Rabbitisrich]

http://blogs.reuters.com/alison-frankel/2013/12/17/new-ruling-puts-fannie-freddie-in-line-for-windfall-mbs-recovery/

 

Ruling on Blue Sky laws in Virginia and Washington D.C.

[ERICOPOLY]

Finally taking their foot off the throat of the banks?

 

All the bank stocks rallied the moment this came out:

 

http://online.wsj.com/news/articles/SB10001424052702304866904579266432764849504?mod=WSJ_Home_largeHeadline

 

After months of intense discussion at the Fed and in financial markets, the central bank's policy-making committee announced Wednesday that in January it would trim its purchases of long-term Treasury bonds to $40 billion per month, a reduction of $5 billion, and cut its purchases of mortgage-backed securities to $35 billion per month, a reduction of $5 billion.

 

In their latest economic projections, also out Wednesday, 12 of 17 Fed officials said they expected the central bank's benchmark interest rate, which is called the fed funds rate, to be at or below 1% by the end of 2015. Ten of 17 officials expected the rate to be at or below 2% by the end of 2016.

[nkp007]

Wonder what's taking the $8.5 billion settlement ruling so long to be decided.

 

 

[ERICOPOLY]

I remember the number Moynihan gave for BAC was an additional $7.4b of interest income if there is a 200 bps parallel shift in rates.  That would be about $5.40 per share increase in share price at 12x multiple, 30% tax rate, and 11.5b shares.

 

So check out the part of the quote below (I added bold emphasis):

 

http://online.wsj.com/news/articles/SB10001424052702304866904579266432764849504?mod=WSJ_Home_largeHeadline

 

In their latest economic projections, also out Wednesday, 12 of 17 Fed officials said they expected the central bank's benchmark interest rate, which is called the fed funds rate, to be at or below 1% by the end of 2015. Ten of 17 officials expected the rate to be at or below 2% by the end of 2016.

[vinod1]

I remember the number Moynihan gave for BAC was an additional $7.4b of interest income if there is a 200 bps parallel shift in rates.  That would be about $5.40 per share increase in share price at 12x multiple, 30% tax rate, and 11.5b shares.

 

So check out the part of the quote below (I added bold emphasis):

 

http://online.wsj.com/news/articles/SB10001424052702304866904579266432764849504?mod=WSJ_Home_largeHeadline

 

In their latest economic projections, also out Wednesday, 12 of 17 Fed officials said they expected the central bank's benchmark interest rate, which is called the fed funds rate, to be at or below 1% by the end of 2015. Ten of 17 officials expected the rate to be at or below 2% by the end of 2016.

 

I think that might be rather optimistic as

 

1. Even if fed funds rate goes up to 2% by 2016, it would likely not be a parallel shift. More likely a 1% shift at 10 year maturity. So the gain would be much more muted.

 

2. As he commented there would be OCI impact to book value that would take 3 years to earn back. I would think there would be a hit to earnings as well as trading securities would lose some value that would pass through the income statement.

 

I am more optimistic on lower loan loss provisions being a tailwind for the next couple of years.

 

Vinod