Will Bank Of America's Real Estate Unit Survive?

Apr.21.14 | About: Bank of (BAC)

Summary

Since it was first reported as a separate unit (Home Loans & Insurance in 2009), CRES has logged nothing but losses.

Reps and Warranties drama continues, as analysts were caught off­ base when the Bank announced a litigation reserve addition of $2.4 billion for the period 1Q14.

Whenever LAS zeroes out, CRES will be left with its "healthy" sub­unit, Home Loans.

Bank of America (NYSE:BAC) reports quarterly results in six units - ­ Consumer & Business Banking; Consumer Real Estate Services (CRES); Global Wealth and Investment Management; Global Banking; Global Markets; and All Other. For 1Q14, the Bank reported positive net income for four units, a loss of $ 182 million for All Other and a whopping loss of $ 5,027 million for CRES. Troubling losses for the real estate unit are nothing new. Since it was first reported as a separate unit (Home Loans & Insurance in 2009), CRES has logged nothing but losses.

2009: -$ 3.8 billion

2010: -$ 8.9 billion

2011: -$ 19.5 billion

2012: -$ 6.4 billion

2013: -$ 5.2 billion

The Bank divides CRES into two subunits, ­ Legacy Assets & Servicing (LAS) and Home Loans. CRES losses are mostly generated by LAS. The LAS subunit carries the loans acquired from Countrywide, which, like the prize catch in Hemingway's "The Old Man and the Sea", will be nothing but a skeleton when it finally reaches a safe harbor. Excessive charges for noninterest expense arise from the large staff required to resolve LAS's problem loans; and from the payments and litigation reserves associated with the ongoing Representations and Warranties Exposure. For 1Q14, LAS noninterest expense was $ 7.4 billion, of which $ 5.8 billion came from Reps and Warranties.

LAS non­litigation expense has declined steadily as the Bank eliminates Countrywide loans from its portfolio, but much remains to be done. The number of LAS loans that are more than 60 days delinquent was 277,000 at the end of the period, and the $ 1.6 billion of noninterest expense ex­litigation remains substantially higher than the subunit's total revenue of $ 686 million. Meanwhile, the Reps and Warranties drama continues, as analysts were caught off-­base when the Bank announced a litigation reserve addition of $ 2.4 billion for the period. Even as the Bank insists that it is putting litigation issues "behind it", there appears to be no end to the new litigations popping up in front of it. Outstanding Claims by Counterparty reached $ 20.3 billion this quarter. At this point there is no way to predict when LAS losses will stop.

Whenever LAS zeroes out, CRES will be left with its "healthy" sub­unit ­ Home Loans. For 1Q14, Home Loans reported a loss of $ 139 million. First­ mortgage originations declined, as did core production revenue. This subunit reports holding $ 51 billion in total loans and leases. Home Loans is operating at a loss, albeit not as spectacular as LAS. But with the Bank reporting Companywide Total Revenue of $ 22.8 billion, Total Revenue for Home Loans is an anemic $ 506 million, just 2.2% of the total.

The challenge for Bank of America is not only to make its real estate unit profitable, but also to make it a more robust contributor to company earnings. Otherwise, CRES will eventually have to be absorbed by Consumer & Business Banking, or disappear altogether.

Disclosure: I am long BAC. 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.