Taking the Bait

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50 | Th e M Rep o RT O r i g i nat i O n S e r v i c i n g a na ly t i c S S e c O n da r y m a r k e t SERVICING Department LocaL eDition mounting legal expenses eat Up Bofa's earnings Resolving settlement issues hit the bank's bottom line. NORTH CAROLINA // Legal expenses took a substantial bite out of Bank of America's first- quarter earnings, resulting in a net loss of $276 million to start the year. The loss follows a profitable fourth quarter of 2013, which saw the bank taking in $3.4 billion. For the first quarter of 2013, BofA reported net income of $1.5 billion. The results for the first quarter include $6 billion in litigation expenses related to a major settle- ment with the Federal Housing Finance Agency (FHFA) over legacy securities claims. Also fig- uring in were additional reserves for previously disclosed legacy mortgage-related issues. "The cost of resolving more of our mortgage issues hurt our earnings this quarter," said Brian Moynihan, CEO of the North Carolina-based megabank. "But the earnings power of our business and customer strategy generated solid results and we continued to return excess capi- tal to our shareholders." As was the case with other banks in the first quarter, BofA also saw mortgage banking revenues decline. The company's Consumer Real Estate Services (CRES) division reported a net loss of $5 billion in Q1, largely on the back of a $3.8 billion increase in litigation costs. Revenue declined to $1.2 billion, with the decrease driven almost entirely by a $548 million decline in servicing revenue—reflecting a smaller portfolio—and a $542 million drop in core production due to lower loan originations. CRES first-mortgage origina- tions fell 65 percent compared to the first quarter of 2013, "re- flecting a decline in the overall market demand for refinance mortgages," the bank reported. Core production revenue was down to $273 million from $815 million a year prior thanks to the slowdown in volume and a reduction in margins. On the other hand, the bank enjoyed a bit of a silver lining in the form of lower credit loss provisions, which were down $310 million from last year, thanks to continued improve- ment in portfolio trends. Wells, JPmorgan Show Bruises in Q1 mortgage results as the maRket shRinks, so do the banks' pRofits. CALIfORNIA // Wells Fargo and JPMorgan Chase experienced very different first quarters, as evidenced by results in their quarterly earnings reports. In terms of mortgage activity, how- ever, both banks felt the sting of a shrinking market. Wells Fargo reported a record net income of $5.9 billion for the first quarter, an increase of 14 percent from the year-ago quar- ter and 5 percent from Q 4 2013. Said chairman and CEO John Stumpf: "First-quarter earn- ings were another record for our company and capital levels continued to strengthen. . . . As we move forward in 2014, I am optimistic about the opportuni- ties ahead and believe that we are well positioned for growth." For its mortgage banking unit, the megabank—credited as the biggest home lender in the coun- try—reported noninterest income of $1.5 billion, a drop of about 3.8 percent quarter-over-quarter and nearly 46 percent year-over-year. According to the bank's state- ments, residential originations totaled $36 billion, down about 66 percent from Q1 2013, while the gain on sale margin was down to 1.61 percent. Applications were also down to about $60 billion, though the application pipeline picked up slightly from the prior quarter to $27 billion as of March 31. Any weakness that existed in mortgage production was offset in part by strength in servicing income: Wells Fargo reported net mortgage servicing rights (MSRs) results were $407 million com- pared to $266 million in Q 4 2013. Meanwhile, JPMorgan Chase reported profits of $5.3 billion for the quarter compared to $6.5 billion a year ago. Compared to the end of 2013, net income was down approximately $4 million. Still, chair and CEO Jamie Dimon asserted JPMorgan Chase "had a good start to the year, given there were industry-wide head- winds in markets and mortgage." "We have growing confidence in the economy—consumers, corporations, and middle-market companies are in increasingly good financial shape and hous- ing has turned the corner in most markets—and we are doing our part to support the recov- ery," Dimon added. In mortgage results, the bank took in a net income of $114 mil- lion, a drop of $559 million from the prior year, "driven by lower net revenue and lower benefit from the provision for credit losses, partially offset by lower noninterest expense." Revenue suffered from a 68 percent year-over-year decline in originations, which totaled $17 billion for the quarter; ap- plication volumes came to $26.1 billion, down 57 percent. Mortgage production-related revenue (excluding repurchase losses) was $292 million, down $926 million from Q1 2013, thanks to lower volumes. Mortgage pro- duction chalked up to a pretax loss, reflecting a combination of $478 million in expenses and a $128 million in benefits from lower repurchase losses. Net servicing-related revenue totaled $713 million, a decrease of $65 million from the prior year. Subtracting expenses and risk management, the company's SERVICING

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