Fortress May Pick Up BofA’s Correspondent Mortgage Unit
Bank of America (NYSE:BAC) has a potential buyer for its correspondent mortgage business in Fortress Investment Group. [1] The troubled bank announced its decision to exit this business, which buys loans originated by third-party correspondents, late last month. ((Bank of America Issues Statement in Response to Media Reports on Mortgage Business, Bank of America Press Releases, Aug 31 2011)) While no final agreement has been reached between Bank of America and Fortress, the latter is conducting due diligence on the deal. Bank of America competes with other major banking groups including JPMorgan Chase (NYSE:JPM), Goldman Sachs (NYSE:GS), Morgan Stanley (NYSE:MS), Deutsche Bank (NYSE:DB), Citigroup (NYSE:C) and Wells Fargo (NYSE:WFC).
We currently have a price estimate of $11 for Bank of America’s stock, which we are reviewing in light of the weak global economic conditions and by the string of lawsuits concerning the bank.
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In recent months, investors have been troubled by the litigation and settlement costs being attracted by the bank’s legacy mortgage portfolio, questioning the sustainability of Bank of America’s mortgage business in the long run. Rumors about the bank having to raise substantial capital to maintain mandatory core capital ratios have also been making the rounds.
The bank’s decision to exit the correspondent mortgage lending division is clearly an attempt to rein in mortgage-related losses and re-instill investor faith in the bank’s mortgage business. Bank of America has been cutting down on its home loans business with the recent decision to exit the wholesale lending and reverse mortgage businesses as well as the decision to sell Balboa Insurance.
While the correspondent mortgage business is operationally a cost-effective channel for Bank of America, it has been riddled with problems due to the lower level of controls related to this mortgage portfolio. According to the bank’s annual report, the correspondent mortgage business was responsible for nearly 25% of the $10.7 billion unresolved repurchase claims for the bank in 2010, a clear indicator of the quality concerns related to the business.
See our full analysis of Bank of America
Notes:- BofA may sell mortgage unit to Fortress: report, Reuters, Sept 23 2011 [↩]