NEW YORK: A decade on big U.S. banks are still running down and selling off crisis-era mortgages, a process executives point to as weighing on loan growth.
Eager to see a turning point in loan books, analysts count these portfolios as one factor, along with home equity loan runoff and new mortgage demand, to watch for when deciphering the true loan growth picture as U.S. second-quarter bank earnings start on Friday.
Wells Fargo & Co and Bank of America Corp executives have flagged portfolios from prior to the 2008-2009 crisis era where banks are no longer originating similar new products when they are asked to predict a turning point in consumer loans.
"These are portfolios of a bygone era that were very, very painful for the banks," said Gerard Cassidy, bank analyst with RBC Capital Markets. "They are not plain vanilla portfolios, which means they are more costly to manage. It may just not be worth the headache."
Analysts have said higher loan growth is critical to driving bank's stock prices, but they anticipate only a modest acceleration year over year, driven primarily by commercial and industrial loans, not residential.
"Remember that there's a portion of that book that, again, is pre-crisis," Chief Executive Tim Sloan said about Wells Fargo's mortgage book at a May conference. He added the bank continues to examine the older portfolio's risk-return tradeoff and sells assets when the opportunity arises, factors "that could have some impact" on growth.
Wells Fargo owns around US$23 billion of "Pick-A-Pay loans it picked up by buying the floundering Wachovia bank at the height of the mortgage crisis, versus US$115 billion 10 years ago. Those loans allowed borrowers to initially choose their monthly mortgage payment, even if it was not enough to reduce the debt.
Bank of America at the end of 2017 had nearly US$11 billion in credit-impaired mortgages left from buying Countrywide Financial, less than one-third of what it held at the end of 2009.
"We're still running off some portfolios, believe it or not, 10 years after the crisis," Bank of America CEO Brian Moynihan said in April when asked about overall loan growth not picking up after the U.S. tax cuts passed by Congress late last year, noting 5 percent growth in core lending outpaced U.S. economic growth.
JPMorgan Chase & Co still owns roughly US$30.5 billion-worth of the US$89 billion in bad loans took on from Washington Mutual in 2008.
The pre-crisis loans do weigh somewhat, but the portfolios' small size mitigates the overall earnings impact, said Keefe, Bruyette & Woods analyst Brian Kleinhanz.
"It's a runoff portfolio so there is some drag to growth," he said.
Most of these mortgages may not be in foreclosure or delinquency. Bank of America said 88 percent of unpaid principal on Countrywide loans was current at end-2017. Runoff or sales can also take a small bite from revenue if the loans are higher yielding than the broader loan portfolio.
Some individual borrowers are still struggling to turn the page a decade later.
The Mortgage Bankers Association said that of the 39 million outstanding U.S. mortgages it tracks, about 1.2 million are seriously delinquent loans issued in 2007 or earlier. The loans have not been paid in at least three months, and many are in foreclosure.
Charlena and Keith Kendrick said they recently filed for Chapter 13 bankruptcy to avoid foreclosure on their suburban Indianapolis, Indiana home. They started struggling to pay their Wells Fargo Pick-a-Pay mortgage in 2012, Charlena Kendrick said. By this May, they owed around US$100,000 on their mortgage and were behind US$11,000 on monthly payments when they say the bank declined their fourth modification request. "I feel like this bad paper to them," she said. "I feel like they really just want to get rid of it." Wells Fargo spokesman Tom Goyda said that the bank works "hard to help customers avoid foreclosure." Since 2009, Wells Fargo has forgiven US$9 billion of mortgage principal, including US$6 billion of Pick-a-Pay loans.
(Reporting By Elizabeth Dilts; Editing by Meredith Mazzilli)