Shares of Bank of America are off about 1% today (not a huge move) after a bummer of an earnings report that confirmed that mortgage troubles continue to weigh on the bank’s bottom line.
The way it was presented was that this was not really reflective of the business, and mainly pertained to charges designed to put the company’s mortgage problems behind it.
So are the bank’s problems over?
John Carney at NetNet argues that the answer is no, and that mortgage problems are likely to persist.
The gist? The bank still did a ton of mortgage activity in 2009, supposedly “post bust” but during a time when homes were rising in value, and there’s no particular reason to believe that credit underwriting was all that good during the time.
These two bullets are particularly salient:
- Freddie Mac recently conducted a review of a sampling mortgages sold to it by Citigroup, and discovered that mortgages in the sample from 2009 had a 32% defect rate. It’s highly likely that other banks, including Bank of America, had similarly flawed mortgage processes in 2009.
- The recent robo-signing scandal has demonstrated that banks had pitiful internal controls over the foreclosure process as late as October of 2010. There’s good reason to suspect that the mortgage origination and purchase process is still broken too.
Bottom line. There’s no inherent reason to assume the right downs are over.
This of course jibes pretty closely with the Chris Whalen nightmare scenario for banks, whereby he sees ongoing costs for them dragging at least through this year.