Falling Foreclosure Rates A Good Sign For Mortgage Banking

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In yet another sign of an improving housing environment across the country, a recent report by RealtyTrac shows that foreclosure activity declined by nearly 5% for the month of April over March. [1] In fact, the report indicates that foreclosure activity, as captured by the number of properties on which a foreclosure filing was reported for the month, was at the lowest level since July 2007. The housing market has seen quite some improvement since the beginning of the year – good news for the country’s biggest mortgage players, namely Wells Fargo (NYSE:WFC), JPMorgan Chase (NYSE:JPM), U.S. Bancorp (NYSE:USB), Bank of America (NYSE:BAC) and Citigroup (NYSE:C).

See our full analysis for Wells FargoJPMorgan ChaseU.S. BancorpBank of AmericaCitigroup

The mortgage business has been on a low since the economic downturn of 2008, with banks suffering substantial losses to their mortgage portfolio over the years. The top 5 banks lost an estimated $65 billion in write-offs and settlements related to their mortgage business over the 2008-2011 period – with Bank of America contributing to nearly half this figure (see Wells Fargo Takes Heat From SEC in $60 Billion RMBS Investigation).

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But things have been upbeat for the banks over recent months, with all of them reporting a marked improvement in results for their mortgage business for the first quarter of the year. A reduction in provision and other charges for the banks can be zeroed in upon as the single biggest reason for this reversal in fortunes.

The RealtyTrac report uses the reported number of U.S. properties with a foreclosure filing – which include default notices, scheduled auctions and bank repossessions – as a proxy for the health of the country’s housing industry. And the fact that the number of such properties is at a near 5-year low does help forecast a continuing improvement in banks’ mortgage businesses for the second quarter of 2012 as well.

We capture the impact of a reduction in mortgage provisions on a bank’s value through our estimates of the mortgage division’s provisions as a percentage of mortgages outstanding as illustrated for Citigroup above. You can make changes to the chart to understand how these provisions affect Citigroup’s share value.

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Notes:
  1. U.S. Foreclosure Activity Shifts Eastward in April, RealtyTrac Website, May 17 2012 []