Nonperforming Mortgage Backlog Is Starting to Clear

 | Aug 08, 2013 | 5:00 PM EDT
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Over the past two or three years, I've written multiple columns on the issue of nonperforming mortgages in the U.S. During that period, I've highlighted the fact that the value of nonperforming mortgages was not declining. That has recently begun to change. 

A year ago, the value of nonperforming mortgages being carried by U.S. banks had been unchanged going back to the height of the financial crisis in 2009, at about $175 billion.

This was largely because the money-centers were simply refusing to deal with the situation and instead were allowing defaulted mortgagors to stay in their homes, not only without them not making mortgage payments but with the banks in many cases paying the real estate taxes to local authorities and the hazard insurance on the residence to the insurance company.  

This stagnation has begun to break as the banks are beginning to put properties through the recovery process, which requires foreclosure and the resale of the property.

In the past 12 months, the value of nonperforming mortgages at the banks has declined each quarter, and as of the end of the second quarter of this year, it was at about $149 billion.

Of the $149 billion in nonperforming mortgages being carried by banks, about $107 billion is in the money centers. Bank of America (BAC) holds $44 billion, Wells Fargo (WFC) $33 billion, JPMorgan (JPM) $22 billion and Citigroup (C) $8 billion.

The most positive notable fact is that the value of the nonperforming portfolio at Bank of America has declined dramatically in the past 12 months. A year ago, the value of defaulted mortgages at Bank of America had been consistently rising quarter after quarter until reaching a peak of about $58 billion, from about $44 billion three years earlier.

In the past 12 months though, that figure has declined by about 25%, back to about $44 billion. That's an impressive achievement, and it indicates that despite the recurring headlines about some new lawsuit against Bank of America concerning previous mortgage issues, the company is indeed on track to having its legacy financial issues resolved.

Bank of America now looks to be on track to survive. However, its dominance of the mortgage market has now been taken over by Wells Fargo. Both Wells and Bank of America carry just shy of $260 billion each in residential mortgages. The portfolio at Wells is rising though, while at Bank of America it is still declining.

There is an ongoing troubling issue at Wells Fargo. The value of the nonperforming mortgages that it carries is remaining constant in the $33 billion range, which is where is has been for the past four years.

I have no idea why that is, but it must reflect some business decision. Wells has an outsized concentration of its nonperforming mortgages in California as a result of the historical regional strength there and its absorption of the World Savings California concentrated portfolio, which it inherited in the takeover of Wachovia. 

The California housing sector has been very active in the past 12 months, and this would have afforded Wells the opportunity to clear its defaulted loans by way of foreclosure and recovery if it had wanted to. For whatever reason, that isn't happening.

JPMorgan and Citigroup have not increased their mortgage portfolios, as I've discussed in the past, but like Bank of America they have reduced the value of their retained nonperforming mortgages by about 20% each in the past year.

At JPMorgan, the value has been reduced to $22 billion from $27 billion, and at Citigroup it has been reduced to $8 billion, from about $10 billion.

The conclusion is that of the four money centers, Bank of America, JPMorgan and Citigroup are reducing their exposure to and activity in the residential mortgage space while continuing to concentrate their efforts on resolving legacy issues associated with the mortgage and housing bust of five years ago.

Wells Fargo is expanding aggressively in the residential mortgage business but not doing anything with respect to resolving its legacy issues.

All in all, it's good news for the banks and logical, with the exception of the Wells Fargo nonperforming mortgages.

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