Bank of America Corporation (BAC) announced this week that it plans to concentrate on direct lending to its customers and will stop using first mortgage wholesale channel (independent brokers) to offer loans. BofA’s move stems from its struggle with a large number of lawsuits, buy-back requests and fraud charges from loans that were originated hastily.
The (Un)Securitized Loan Problem
Since wholesale mortgage originators have little contact with the loans once these are securitized, they are liable to palm off most responsibility to the purchasers of these loans. In their rush to give out and securitize more loans, they gloss over scrutinizing the documents of borrowers, leading to errors.
Loan purchasers like Freddie Mac (FMCC) and Fannie Mae (FNMA) are now burdened with uncollectible loans, and are forcing service providers like BofA, JPMorgan Chase & Co. (JPM), Citigroup Inc. (C) and others to buy back such debts even as defaults, mortgage delinquencies and foreclosures continue to increase.
In 2009, JPMorgan did a similar thing, stating that loans originating in-house performed much better than those that came in from the brokers. In 2008, Citigroup also started rationalizing its wholesale operations.
BofA’s Salvage Measures
BofA is at present working closely with the first mortgage wholesale clients so that loans that are in progress are fully processed for the customers. This plan will come into effect once the orderly transition of loans is completed.
The company is trying to focus its operational resources towards its direct-to-consumer retail channel, thus helping existing and new customers obtain mortgage financing. The company is likely to allocate additional resources towards enhancing its leadership in correspondent and warehouse lending.
BofA has about 1,000 employees in its first mortgage wholesale channel. These employees will have a chance to get transferred to the company’s other home loan units — direct-to-consumer unit, retail sales, correspondent and warehouse lending and teams that are helping distressed borrowers.
BofA is poised to benefit from its large scale operations, strong capital position and balance sheet restructuring, offset by concerns related to inconsistent credit quality and the impact of tighter regulations of the new financial reform law.
BofA currently retains its Zacks #3 Rank (short-term Hold rating), implying that the stock is expected to perform in line with the broader U.S. equity market in the near term.
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