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VOL. 37 | NO. 2 | Friday, January 11, 2013

Bank of America's earnings shrink on mortgage settlements

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NEW YORK (AP) — The housing crisis is still weighing down Bank of America.

The bank said Thursday that fourth-quarter earnings and revenue shrank as it continued to work through legal and regulatory problems related to mortgages. It's become a familiar story for the bank, whose problem loans have tarnished its results and its reputation.

This time, though, there was a difference. After years of shedding undesirable parts of its mortgage business, Bank of America wants to regain some of the ground it lost in home lending. The bank doesn't want to miss out on a lucrative boom in mortgage refinancing and an emerging recovery in housing.

To do that, it's moving workers from the unit that works through troubled mortgages to the business that makes new home loans. It's trying to close loans more quickly and get employees throughout the bank to work together more.

The bank also said it will focus its mortgage drive mostly on people who are already bank customers, afraid that pushing loans indiscriminately would send it right back to the high losses wrought by risky loans made before the housing bubble.

"We need to really focus on people that we are very comfortable with," CEO Brian Moynihan said in a call with analysts.

The bank's U-turn on mortgage strategy is a signal that the housing market, in some respects, is improving. Its caution signals that the lessons of the financial crisis are still fresh.

Housing prices are rising in many parts of the country, and foreclosures are easing. Low interest rates and government programs are encouraging people to refinance, which helped drive stronger results at Bank of America as well as rivals like Wells Fargo and JPMorgan Chase. On Thursday the government reported that home builders broke ground on homes last month at the fastest pace since 2008.

Bank of America funded more than $22 billion in mortgage loans in the fourth quarter, up 41 percent from the year before. Mortgage loans grew faster than at Wells Fargo or JPMorgan, but that's partly because Bank of America controls a much smaller share of the market. Wells Fargo funded $125 billion in mortgages for the fourth quarter, up 4 percent. JPMorgan funded $51 billion, up 33 percent.

Bank of America used to be a much bigger player in mortgages. It now makes about 4 percent of the mortgage loans in the U.S. That's down from nearly 22 percent in 2009, after it bought mortgage lender Countrywide, according to the trade publication Inside Mortgage Finance. The No. 1 lender, Wells Fargo, has 30 percent.

Bank of America catapulted to a top spot in mortgage banking when it gobbled up Countrywide in the summer of 2008, a few months before the financial crisis imploded. The bank initially hailed the purchase as a coup. Instead, it turned into a debacle after defaults mounted and the riskiness of Countrywide's lending practices became clear. Bank of America has endured a string of quarterly losses, government investigations and other regulatory headaches.

The experience has driven Moynihan, who became CEO a year and a half after the Countrywide purchase, to scale back certain mortgage businesses. Earlier this month, the bank sold off the rights to service a portfolio of loans, many of which were delinquent and expensive to service.

Bank officials emphasized areas of growth over the year, saying the bank is much better positioned than it was a year ago. Bank of America brought in more deposits, booked more fees in investment banking and more than doubled its profits from wealth management.

But reminders of the mortgage mess were impossible to miss.

Earnings and revenue slipped as the bank took big charges related to two settlements relating to mortgages. Earlier this month, Bank of America and other banks agreed to pay a combined $8.5 billion to settle government accusations that they had wrongfully foreclosed on struggling homeowners. It also settled mortgage-repurchase disputes with Fannie Mae, the government-backed mortgage agency. Before the financial crisis, Fannie Mae bought mortgages from Bank of America and others that have since plunged in value after borrowers defaulted, and the agency had been demanding that Bank of America buy back many of the loans.

The mortgage litigation has made the bank's earnings unpredictable, and no one is sure how long that will continue. There are other fights, including repurchase demands from private investors, that could hammer future financial results.

Chief Financial Officer Bruce Thompson said he couldn't be sure what litigation might come, but he cited the recent settlements as proof that the bank is working through the problems.

"I can't tell you exactly what else could be out there," he said, "but what I can tell you is that we put a lot of risk behind us in 2012."

Bank of America had already disclosed that the mortgage settlements would hurt its earnings. The bank took a charge of $2.7 billion because of the Fannie Mae settlement and a $1.1 billion charge for the foreclosure settlement, among other charges.

The bank made $367 million in the last three months of 2012 after paying preferred dividends, down sharply from $1.6 billion in the same period a year ago. Those earnings amounted to 3 cents per share. Bank of America's stock fell 45 cents to $11.33 in midday trading.

Revenue was also dragged down by the Fannie Mae settlement. Revenue dropped to $19.6 billion after stripping out an accounting charge, down from $26.4 billion in the same period a year ago.

The bank has been cutting jobs and other expenses. The number of employees fell to 267,190, down about 14,600 jobs since a year ago.

Analysts called it another quarter of earnings sacrificed to working through the mortgage problems. "Making expensive progress" is how Nomura analyst Glenn Schorr characterized the quarter.

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