Contending with the barrage of lawsuits over mortgage securities and residential foreclosures has made Bank of America wary of anything other than issuing vanilla home loans. Barely four years ago, Bank of America was the dominant player in the mortgage market with a hefty portfolio inherited from its acquisition of Countrywide Financial.
But that deal became an albatross that the bank has fought hard to loosen. Analysts estimate that Bank of America has lost nearly $40 billion on mortgage litigation and repurchases of soured loans tied to Countrywide. The fallout from the deal has led the bank to reduce its participation in the mortgage industry, leaving the market in the hands of fewer players to the detriment of borrowers.
“You have less competition, and as a result the pricing has gotten worse,” said Guy D. Cecala, publisher of Inside Mortgage Finance, a home-loan publication. “Mortgage rates should probably be closer to 3.25 rather than 3.5. One of the reasons they aren’t is because banks aren’t that competitive and don’t have to be to get business.”
Buying Countrywide grew Bank of America’s market share in mortgage originations from 7.8 percent in 2007 to 21.6 percent in 2009. That number has fallen to 4.2 percent as of September 2012, according to an analysis by Inside Mortgage Finance. Wells Fargo, with about 30 percent of the market, has supplanted Bank of America as the nation’s largest mortgage lender. JPMorgan trails in second place with 10.3 percent.
“If we want to open up competition, we not only have to show a willingness to settle the litigation but also make it a more favorable environment for lenders,” said Christopher Mayer, a professor of real estate finance and economics at Columbia University. “There is too much uncertainty in the market, which is making lending unattractive.”
Mayer said policymakers need to clearly define the new parameters of the mortgage market, such as reforming Fannie Mae and Freddie Mac, to give lenders more certainty. Until then, the mortgage industry will continue to consolidate.
Cecala expects the void left by Bank of America will eventually be filled by other lenders who will step up their businesses once there is more clarity about the future of the mortgage industry. In the interim, the mortgage market will likely remain in the hands of a few well-heeled players.
Officials at Bank of America say the bank has not completely given up on the housing market, but it is focused on reducing risk. To that end, Bank of America has stopped buying loans from other lenders in what is known as wholesale deals. Those kinds of deals represented nearly half of Bank of America’s mortgage business four years ago.