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Mortgage Problems Still a Big Drag on Bank Earnings

Margaret Popper|Senior Producer HKSCKPVIamp; Editor
Friday, 15 Apr 2011 | 7:30 PM ET

If there’s one takeaway from the banks’ first-quarter earnings this week, it’s got to be this: Mortgages are still a real problem.

Comstock Images | Getty Images

It became evident with JPMorgan Chase’s results on Wednesday. The company beat earnings estimatesonly because it made so much money trading commodities. The mortgage picture was grim — a $1 billion charge for the increased cost of mortgage servicing thanks to new regulations, and another $650 million for increased foreclosure costs.

“It’s more people, more costs, more compliance rules,” JPMorgan CEO Jamie Dimon told reporters on a conference call after the bank’s results were released. “It’s going to cost more money” to service mortgages and complete foreclosures.

Those costs rose while JPMorgan’s portfolio of residential mortgage loans shrank 12 percent.

In part, Dimon blames the rising costs on the fact that state attorneys general haven’t been able to reach a universal settlement with the banks on their mortgage servicing. He says it’s making the problem worse. “We have homes sitting there for 500 days rotting that we can’t do anything about,” he said. “That’s not good for anybody.”

Certainly the market’s not thrilled about the deteriorating mortgage picture. JPMorgan’s shares closed at $44.89 Friday , down 3.5 percent from when earnings were announced.

The story’s no better at Bank of America — actually a bit worse. The country’s biggest bank took $3.8 billion in charges related to mortgages.

BofA took a $1.4 billion dollar hit to revenue, about $1 billion of which came from underestimating the number of bad mortgages it would have to buy back from various parties. About half of that came from bigger-than-expected demands from Fannie Mae and Freddie Mac to buy back mortgages. The other half covered part of BofA’s buyback settlement with monoline insurer Assured Guaranty .

Then there’s that increased cost of dealing with foreclosures that Jamie Dimon was complaining about. That took a $1.6 billion bite out of BofA’s earnings.

“We don't expect the mortgage picture to improve significantly for several quarters,” said outgoing CFO Chuck Noski. Probably that's why Bank of America’s shares hit $12.82 at the close , down 2.4 percent for Friday.

That doesn’t bode so well for Wells Fargo whose earnings come out next week.

”Wells Fargo is worrisome if they take a servicing hit like JPMorgan,” says Rochdale Securities analyst Dick Bove. “They don’t have the trading offset.” Shares of Wells Fargo ended the day at $29.89 — down 4.68 percent since Wednesday.

Citigroup relegated its consumer finance business to CitiHoldings — the businesses it wants to ditch. Nonetheless, the business has been performing fairly well, even in its current holding pattern. Citi also has a bigger investment bank and international exposure to offset any troubles in its mortgage portfolio.

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