Origination and servicing
The two activities associated with residential loans are origination and servicing. Origination simply means providing new loans. Loan origination covers disbursement. Servicing means handling all activities after loan origination until the time the loan is repaid, including collecting monthly payments.
Often, companies sell originated mortgages. They’re serviced by other companies, some of which specialize only in mortgage servicing. Bank of America provides both origination and servicing of loans.
Origination and servicing of loans by Bank of America (BAC) have both declined since the mortgage crisis, as shown in the above graph. Loan originations have been declining primarily due to lower loan application volumes. This reflects the decline in the market demand for mortgages.
Servicing volumes declined primarily due to MSR (mortgage servicing rights) sales, loan sales, and other servicing transfers, modifications, paydowns, and payoffs.
Leading bank by volume
At the end of 2013, Bank of America (BAC) accounted for the largest chunk of total outstanding residential loans held by US banks. Wells Fargo (WFC), JPMorgan Chase (JPM), Citibank (C), and Bank of America (BAC) together held 43% of the total residential loans held by banks.
There are various other players in the residential mortgage market, including Freddie Mac (FMCC), Fannie Mae (FNMA), and Ginnie Mae (GNMA). Then there are companies focused on one segment, such as Ocwen Financial Corporation (OCN) that specializes in loan servicing. Most of the other banks in the Financial Select Sector SPDR ETF (XLF) have much smaller residential loan portfolios.
Is the market ready to recover?
The total of outstanding residential loans at Bank of America (BAC) has shown a decline since the 2008 mortgage crisis. This is in line with the industry trend. The residential mortgage market is expected to show recovery in the coming years, primarily fueled by more relaxed lending standards. If this happens, it will give a boost to Bank of America’s revenues from this segment.
In the next part of this series, we’ll see how Bank of America’s (BAC) stock compares to its peers.