Bank of America Corp (NYSE:BAC) investors who trusted Brian Moynihan and held on to their shares through 2012 are undoubtedly pleased with the 100%-plus share price appreciation. Rightfully so: Moynihan has been praised for his ability to navigate a legal minefield, divest non-core businesses, and build industry-leading capital ratios. However, B of A’s inactivity in the consumer mortgage origination business in 2012 highlights Moynihan’s lack of operational prowess.
Wrong place, wrong time
In 2012, domestic mortgage origination volume grew a staggering 30% to over $1.8 trillion, primarily due to consumers refinancing homes as housing prices improved and interest rates remained at historical lows. In addition to shuffling his management team in late 2011 and retreating from the bank’s now-infamous $5 debit card fee decision, Moynihan chose to exit the corresponding mortgage lending space, a business in which typically small lenders sell loans to larger lenders. Because of changing capital rules, the correspondent business increased risk-weighted assets during a time when Bank of America Corp (NYSE:BAC) desperately needed to show improved liquidity ratios. While it may have been a necessary decision for B of A management to make, correspondent lending accounted for roughly 50% its mortgage lending business, and the exit drastically reduced the bank’s presence in the market.
Ready, aim, originate
Unlike their Charlotte, North Carolina-based rival, Wells Fargo & Co (NYSE: WFC) and JPMorgan Chase & Co. (NYSE:JPM) entered 2012 well-positioned to handle the tidal wave of refinancing activity. Wells Fargo burst out of the gate and generated $2.9 billion in mortgage banking non-interest income in the first quarter, a 21% increase from just the previous quarter. Although JPMorgan Chase did not experience the same immediate rush of refinance activity, in the second quarter, origination volume jumped 14% as business in its retail channels surged, a coveted transaction Moynihan hopes to achieve with his bank’s affluent client base. Adding to the joy of these two mortgage behemoths was the lack of competition because of the decimation of lenders after the housing crash. Not only were Wells Fargo & Co and (NYSE:WFC) JPMorgan seeing record volumes, they were also seeing increased pricing power!