This News Sent Bank of America Higher Today


Shares of the nation's second largest bank by assets, Bank of America , are trading sharply higher today, up more than 2.7% in afternoon trading.

At first glance, it's difficult to discern the forces behind this move, as the company hasn't made any new announcements since reporting otherwise lackluster earnings in the middle of January. If you dig a little deeper, however, the impetus appears to be an upbeat report about the state of the mortgage market.

Mortgage delinquencies continue to fall
The consumer credit company TransUnion released data this morning showing that fewer Americans are falling behind on their mortgages. According to the figures, the number of borrowers behind on mortgage payments dropped from 5.41% in the third quarter of last year down to 5.19% in the fourth quarter.

Even more impressive was the year-over-year decline. Mortgage delinquencies in the final three months of 2012 were an impressive 14% lower than the same time period in 2011. This comes on the back of 7% and 6% declines in 2010 and 2011, respectively.

"The national mortgage delinquency rate experienced its largest yearly decline since the conclusion of the recession, though we still remain far above normal levels," said Tim Martin, group vice president of U.S. Housing in TransUnion's financial services business unit.

"For the most part, newer vintage mortgage loans are not the reason for the stubbornly high delinquency rate," Martin continued. "They are performing relatively well. The elevated delinquency levels that we still are experiencing are a result of older vintage loans -- borrowers who haven't been making their payments for a rather long time that are still in the system, inflating the overall rate."

Banks aren't out of the woods yet
This isn't to say, of course, that banks are out of the woods yet. In normal times, a default rate of 1.5% to 2% is considered the standard. As a result, lenders are still sitting on significantly higher losses than they typically would be. But if you exclude the percentage of borrowers that haven't paid their mortgages in over a year, according to the Street, the delinquency rate drops to a much more reasonable 2.5%.

The biggest impediment to faster improvement in this regard has to do with the foreclosure process. "The declines in the mortgage delinquency rate will likely be muted for the foreseeable future as the foreclosure process in some states can take more than 1,000 days," said Martin.

Further aggravating this bottleneck are regulations recently passed by the Consumer Protection Financial Bureau. Among other things, the new rules require that mortgage servicers wait at least 120 days before starting the foreclosure process.

It's for this reason, in turn, that TransUnion believes the mortgage delinquency rate will remain above 5% through the first quarter of 2013. "It's not clear yet, but recently announced regulatory rules related to mortgage servicing may tend to slow down this process further. What is clear from the data TransUnion collects is that, until the old vintages work through the system, we expect the delinquency rate to remain elevated."

How the biggest banks are faring
For the largest lenders in the country, this news offers both a hard dose of reality and a further inkling of hope.

B of A and Citigroup in particular have struggled to work through billions of dollars of bad mortgages on their books over the last five years. In B of A's case, its Legacy Assets and Servicing portfolio, which holds toxic mortgage-related assets, was sitting on $136.7 billion in loans at the end of the third quarter. And as I discussed here, Citigroup had a similar magnitude of bad mortgages in its own "bad" banking division, Citi Holdings.

This is likely the reason that B of A and Citigroup are leading their peers in the market today, up 2.7% and 3%, respectively, compared to the KBW Bank Index, which is up by only 1%.

Conversely, both Wells Fargo and JPMorgan Chase have already rebounded considerably over the past few years. Wells Fargo, in particular, is originating more loans now than it ever has. In the final quarter of last year, for instance, it underwrote a staggering $125 billion in mortgages -- click here to see a chart of the nation's five largest mortgage originators. And JPMorgan didn't do so poorly itself, originating a second-best $51 billion over the same three-month time period.

While today's news is still good for them, as evidenced by the performance of their shares which are up 0.5% and 1.3%, respectively, their more reasonable exposure to sour mortgages makes it a bit less so.

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