Wachovia Corp. announced a whopping second quarter loss of $8.9 billion this morning, with plans to shake up its mortgage unit, slash its dividend payout to shareholders, and cut thousands of jobs. [Snip]Compare this report from The UK Guardian about the other major bank with headquarters in Charlotte, NC.
As reported in today’s Observer, Wachovia announced this morning that it plans to cease making mortgages through third-party brokers. At the end of the first quarter, about 30 percent of the bank’s mortgage loans were made through third-party brokers. As recently as last month, the bank said it remained committed to using those brokers, especially in areas where it doesn’t have brokers.
But in a memo to employees yesterday, Tim Wilson, the head of loan origination for Wachovia Mortgage, wrote: “Going forward, we will primarily focus on customers who have relationships with the bank, and who are located in geographies where Wachovia branches are located.”
The change in strategy is part of a larger plan to rein in mortgage losses, which have been on the rise since Wachovia’s $24 billion purchase of Golden West Financial Corp., a troubled California mortgage lender, in 2006. The so-called Pick-a-Payment loans, which Wachovia inherited from Golden West, have proved a headache for the bank and a lightning rod for shareholders, defaulting at higher rates than other mortgages.
In April, the bank tightened underwriting standards, and last month, it stopped offering the “negative amortization” option for Pick-a-Pay loans, which let the borrower pay less than the interest owed. Those loans are criticized by consumer advocates because their balance can increase instead of decrease. Wachovia has also said that it will help customers with Pick-a-Pay mortgages refinance into traditional mortgages.
NEW YORK, July 21 (Reuters) - Bank of America Corp reported quarterly profit on Monday that fell less than expected on record revenue, boosting shares of the largest U.S. retail bank and mortgage lender despite a surge in bad loans.Each bank, Wachovia and Bank of America, recently merged with a major mortgage broker. Each has suffered severe losses as a result, which is going to come straight out of bank capital. Losses from bank capital limit the ability of a bank to continue lending. Wachovia is shrinking as a result and getting out of the business of providing loans to independent mortgage brokers. That will at least give Wachovia more control over the quality of the loans they accept going forward.
The bank became the fourth of the nation's five largest to top quarterly earnings forecasts, joining Citigroup Inc, JPMorgan Chase & Co and Wells Fargo & Co.
Profit at Bank of America fell 41 percent, the fourth straight quarterly decline, as the bank more than tripled its reserve for loan losses because of falling home prices and a weak economy.
Offsetting this was a higher lending margin, near-record investment banking income and a $357 million trading profit, following $8.55 billion of trading losses in the prior three quarters.
"It suggests the credit crisis isn't as bad as people thought" for lenders, said Steve Roukis, managing director at Matrix Asset Advisors Inc in New York, which invests $1.4 billion. "A week ago there was tremendous fear about systematic risk to the system. There's definitely a floor here."
Second-quarter net income for Charlotte, North Carolina- based Bank of America fell to $3.41 billion, or 72 cents per share, from $5.76 billion, or $1.28 per share, a year earlier.
Excluding merger costs, profit was 75 cents per share. On that basis, analysts had expected 48 cents per share, according to Reuters Estimates. Revenue increased 4 percent to $20.32 billion, topping the average $18.26 billion forecast.
Bank of America also said its July 1 purchase of Countrywide Financial Corp, once the largest mortgage lender, will add to profit in 2008, sooner than expected, and result in $900 million of cost savings, $230 million more than expected.
Countrywide lost $2.33 billion in the quarter, including about $3.7 billion of credit-related write-downs and losses, Bank of America said. About 7,500 jobs, or 3 percent, will be eliminated from the combined companies, the bank has said.
Bank of America set aside $5.83 billion for bad loans, up from $1.81 billion a year earlier, largely for home equity, residential mortgage and homebuilding exposure.
The provision was nearly as large as the first quarter's $6.01 billion. Net charge-offs more than doubled from a year earlier to $3.62 billion from $1.5 billion.
Since Wachovia bought Golden West Financial a while back, before the mortgage crisis had blown up into the utter disaster it has recently become, they probably paid a great deal more for it than BoA did for CountryWide. In fact, BoA got CountryWide by issuing stock instead of paying for it. It was a fire sale of a company that could not survive otherwise.
In either case, though, mortgage lending is going to be quite restricted for the foreseeable future. Since both banks have lost capital all kinds of lending is going to be constrained. I'd bet the lending particularly to consumers is going to be reduced.
The current financial problems are not going to be fixed this year. That's the "bottom line" from this news.
I wonder what we will learn tomorrow?
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