Bank of America’s Inaccurate Reporting of its Residential Mortgage Loan

Henry Blodget’s worries regarding the quality of Bank of America’s mortgage loans show several interesting details. However, he seems to be looking in an incorrect place.

According to a Blodget’s statement in “The Bomb That Might Blow A Hole In Bank Of America,” a Business Insider piece, the biggest bank of the country only accounted $19 billion worth of residential mortgage loans that are deemed to be nonperforming. This totals to only 5% of the entire residential mortgages on its balance sheet and a $21 billion worth of loss reserves in loans.

To begin with, the detail in the story of the $21 billion used to pay for expected losses from potentially bad loans is inaccurate. As of June 30, the bank reported a total of $37.3 billion for loan allowances and rent losses. This can be seen on page 129 of Bank of America’s 10-Q reporting with the Securities and Exchange Commission.

In terms of the chances that there was under-reporting of problem mortgages, the story given was a real mistake because the reported 5% also accounted for Bank of America’s mortgage loans that were obtained from Countrywide. Jerry Dubrowski, spokesman of Bank of America, established that they previously lowered the loans of Countrywide to an acceptable value.

Excluding the loans of Countrywide, residential mortgages that are fully-insured and loans that have already been lowered to a fair value, the Banks total mortgage loan amounts to $169.869 billion. This accounts to one out of four of the mortgage loans included in its main portfolio as of the 30th of June. $16.726 billion of this amount or 9.84% are categorized as nonperforming loans.

Bank of America divides the Countywide loans to show the past write-downs on loans considered as “purchased credit impaired.” This was also done in order to better represent the credit risk in the loan portfolio of the residential mortgage.

Blodget also says that about 35% of the bank’s residential real-estate loans amounting to $413 billion might be in trouble in the future. This is according to an unnamed analyst’s scrutiny of the securitized mortgage delinquencies in the entire industry.

However, according to Rochdale Securities’ Richard Bove, the idea that the bank’s credit quality in its self-originated core portfolio is weak as the loan portfolio from the wholesale lending operations of Countrywide is already beyond the imagination.

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