Bank Of America: New Lending Rules Could Help

Jan.10.13 | About: Bank of (BAC)

I have written about Bank of America (NYSE:BAC) quite often on Seeking Alpha, plus I have invested in the stock as well as having it in the Team Alpha portfolio.

I was buying when investors were reluctant to go near the stock and was fortunate enough to get in at around $5.15/share or so. I sold the shares in the $10 range and wrote an article suggesting that investors take some profits, as I noted some of the headwinds facing BAC and the banking sector. I did not think the share price would tank, but I did believe that it might be dead money in 2013.

I was wrong.

Bank Of America Is Still Poised To Double

I will not place a timeline on my opinion, but it might be sooner than many investors think. Keep in mind that the goal of Brian Moynihan, CEO, has been to streamline the bank to become the biggest, "small bank" in the USA. As noted in this previous article, Moynihan was earnest in cleaning up the balance sheet and also maintaining a sound mortgage lending business. Making some fundamental changes within the segment by not playing by Fannie Mae rules, Moynihan basically said enough was enough. As I wrote previously:

By drawing the line in the sand, BAC is adding another wedge between its "Countrywide" business model," and re-establishing itself in the mortgage business going forward, and is also saying it will not spend any more money to buy back more of the mortgages that Fannie insists on, capping the already agreed upon amounts.

BAC insists that its mortgage business will not suffer, as they will turn to Freddie Mac (OTCQB:FMCC) and Ginnie Mae, as well as other sources of liquidity to drive its business. Some might say that Fannie does not care since BAC would still be using Freddie but I don't believe that is the important consideration. Moynihan is basically "cleaning up the Countrywide mess" which is great news for investors in my opinion. Even as the legal battles continue.

Now less than one year later, those moves have been paying off. The share price has more than doubled and the balance sheet has been cleaned up extensively. Bank of America is making more money now, by not lending mortgages, than ever before and has complied with all Federal regulations to have sufficient capital to avoid the financial disasters that occurred back in 2007-08.

Looking at this chart, all of the key metrics continue to head in the right direction. Not to mention that there is still a book value of around $20.00/share. A discount to book is evident and even though BAC has closed the gap, there is significant room to grow.

Now The Future Of Mortgage Lending Can Add Value

It was announced today that the newly created CFPB has laid the framework for new lending standards for mortgages. As this report states:

The Consumer Financial Protection Bureau said its new guidelines would also protect borrowers from irresponsible mortgage lending by providing some legal shields for lenders who issue safer, lower-priced loan products.

The agency seems to be playing right into the tough lending standards that BAC began imposing when it began cleaning up the Countrywide fiasco. Not only is the agency setting some strict guidelines, which will obviously help the consumers know that they can or cannot afford a mortgage, nor will they be fed the ridiculous sub-prime loans that got them (and us) into the mess in the first place.

The key takeaways from this framework are:

  • The debt-to-income ratio cannot exceed 43% to qualify for an FHA mortgage.
  • Qualified mortgages would not have interest only features, nor balloon payment "trip-ups."
  • There would be a 3.5% cap on loan origination fees.
  • Banks that conform to these standards will be shielded from future litigation.

The entire framework can be viewed in this report directly from the CFPB.

"The Consumer Financial Protection Bureau (Bureau) is issuing a final rule to implement laws requiring mortgage lenders to consider consumers' ability to repay home loans before extending them credit. The rule will take effect on January 10, 2014."

On the surface, the framework leans towards consumer protection which it does. The meat on the bone for BAC and other mortgage lenders is that if they follow the framework, they will be "shielded" from litigation liability.

I believe that this could spur Bank of America to actively re-grow its mortgage business, but in a safer and less risky way than ever before. If it succeeds, this could add billions of dollars in revenues that would have far less risk attached than mortgages of old, and the bank itself would have some legal barriers for its benefit.

My Opinion

Based on new developments, I now believe that BAC could further offer investors strong capital appreciation in the not-too-distant future.

As the bank continues to strengthen its business and balance sheet, it could also take advantage of new mortgage lending guidelines to also grow that business.

Please do your own research prior to buying or selling this stock or any stock. Do not base your financial decisions solely on the opinions offered here.

Disclosure: I have no positions in any stocks mentioned, but may initiate a long position in BAC over the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.