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Bank of America: Probably Still Screwed

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Brian Moynihan looked and sounded confident this morning as he closed out his first year as President and CEO of Bank of America.

This is quite a feat considering that Bank of America posted a fourth-quarter net loss of $1.24 billion, or 16 cents a share. Analysts had expected the bank to earn 14 cents a share.

Revenue, which analysts had predicted would come in at $25 billion, was down 11% to just $22.7 billion. The $3 billion mortgage repurchase provision Bank of America announced just 3 weeks ago has grown to $4.1 billion. The bank took an additional $2 billion charge on the declining value of Countrywide.

Bank of America is trying to sell the market on the idea that last quarter—in fact all of 2010—saw a close to its troubles.

“Last year was a necessary repair and rebuilding year," Moynihan said. "Our results reflect the progress we are making at putting legacy—primarily mortgage-related-issues behind us.”

On CNBC’s Squawk Box, Moynihan said that the mortgage-related charges “won’t be recurring.” He even said that the bank would like to start raise its dividend in the second half of 2011.

The bank put an upward number of $10 billion on mortgage repurchase liability, but noted that theoretically the number could be as low as zero.

The “we put that behind us” line seems to be working. DealBook said the losses underscore “the still lingering effects of the mortgage mess.” Any number of other stories relate the losses to the acquisition of Countrywide and those “legacy” loans from 2005-2008, the worst years of the housing bubble.

I’m not so sure the problems at Bank of America are all in the past. Let’s focus on Bank of America’s mortgage lending. Now everyone knows the old story line about mortgages that goes like this: following the credit crunch of 2008, mortgage lending was much tighter, underwriting standards much better, and mortgage quality much higher.

The problem is that there is very little evidence to support this. In fact, we have lots of anecdotal evidence that the mortgage pool of 2009 might be nearly as toxic as those from the worst years of the housing bubble.

Let’s run through some data points on 2009:

  • The mortgage volume was GIGANTIC. Around $2 trillion of home loans were made in 2009, the majority of them by the largest banks. That’s not really that far behind 2007’s volume of $2.4 trillion.
  • Bank of America was the second largest mortgage lender in 2009, behind Wells Fargo. Its volume was up 116% over the previous year. Meanwhile, Citigroup and JP Morgan were pulling back, allowing the size of their mortgage business to shrink.
  • 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.
  • The government intervened heavily in the housing market by putting in place a home buyer tax credit that allowed some buyers to pay for their downpayments with the tax credit. Essentially, some of these people put no money into their houses. We have no good estimate about how large this problem might be.
  • The growth of the balance sheets of the FHA, Fannie, and Freddie took a lot of the immediate risk out of lending—risk that could return if the government mortgage companies start demanding that banks repurchase loans or cancelling insurance.

So far, the mortgages from 2009 have been performing well. But they are only one year old—and during much of that year home prices were appreciating. If home prices dip again, many of these borrowers will find themselves with declining equity and increasing reasons to default. Legal backlash against foreclosures has made it possible for many homeowners to stay in their homes for a very, very long time after they stop paying.

In short, we may soon discover that the home loans made in 2009 were far worse than is currently appreciated. And Bank of America was the second biggest lender in that market. The “lingering” mortgage mess may wind up lingering a lot longer than anyone thinks.

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