Top-20 U.S. mortgage lender Bank of America (BofA) reported declining mortgage and home equity production in the third quarter of 2023, compared to the previous quarter. And more declines are yet to come if regulators’ proposed capital rules are applied to banks, according to BofA’s executives.
On July 27, the Federal Reserve, Federal Depository Insurance Corporation (FDIC) and the Office of the Comptroller of the Currency (OCC) released the proposed changes for the Basel III rule (called the Basel endgame). It significantly increases capital requirements for banks.
“If we add to our capital, it will reduce our lending capacity to American businesses and consumers, and those trade-offs are being debated,” Brian Moynihan, chair and CEO of BofA, said in a call with analysts on Tuesday morning.
“But as far as the rules are concerned, there are many parts of the rules that our industry doesn’t agree with because of double counts or increased trading and market risk. And we’re talking to those proposals and working, and we’re hopeful they’ll change,” Moynihan added.
According to Moynihan, BofA holds the required capital today. “And, of course, we’d have to build a buffer to that throughout the implementation period.”
“Once we understand the final rules, we’ll, of course, have a chance to optimize our balance sheet and appropriately price assets to improve the return on tangible common equity.”
Regarding the mortgage space, Alastair Borthwick, BofA’s chief financial officer, said, “It is a little puzzling that you see some of the RWA [risk-weighted assets] increases for mortgage loans.”
“Now what would happen is we’d have to adjust the pricing, and it would become more expensive,” Borthwick said.
Mortgage, home equity volumes
BofA’s mortgage originations totaled $5.6 billion during the third quarter of 2023, a 5.8% decline from $5.9 billion posted in the second quarter and a 35.8% drop from the $8.7 billion originated in the third quarter of 2022.
BofA’s sequential production decline follows that of Wells Fargo, which also posted lower mortgage volumes during the third quarter. Meanwhile, JPMorgan Chase slowly improved its production in the period, showing a different path.
BofA also originated $2.42 billion in home equity loans in the third quarter, which was flat compared to last year but lower than the $2.54 billion volume in the previous quarter.
Bank of America had $229 billion in outstanding residential mortgages on its books through Sept. 30, up from $228.7 billion in Q2 2023 and $228.4 billion in the third quarter of 2022.
The home equity portfolio was $25.6 billion at the end of the third quarter, down from $25.9 billion from the previous quarter — and a decline from $27.3 billion a year prior.
Bank of America’s total mortgage-backed securities reached a $32.1 billion fair value as of Sept. 30, compared to $33 billion as of June 30, 2023.
Overall, the bank posted a net income of $7.8 billion from July to September, increasing 5.3% quarter over quarter and 10% year over year.
Deposits at Bank of America were $1.88 trillion in the third quarter of 2023, flat compared to the previous quarter. The consumer banking division posted a net income of $2.86 billion, up $11 billion compared to the prior quarter, according to its filing with the Securities and Exchange Commission (SEC).
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