Rewind nearly a decade, and Bank of America Corporation's (BAC) mortgage lending unit was issuing $100 billion in new loans in one quarter alone. Now a business that had revenue of more than $1 billion each quarter is being counted as "other income" on the bank's financial statements, underscoring the changes in the mortgage industry.
According to Bloomberg News, when Bank of America reported first quarter earnings this week, the bank lumped revenue from the mortgage unit with "other income," saying only that the business was "lower" in the first three months of the year. Bloomberg noted that the fees the banking giant earned from originating and servicing home loans have become so small that it stopped reporting them.
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Ever since the financial crisis and real estate bust, Bank of America has been moving away from issuing residential mortgages, originating just $9.4 billion in the first quarter. As a result of the pullback on the part of Bank of America and other traditional banks, fintechs and mortgage lenders like Quicken have stepped up to fill the gap.
According to a new research report from the Federal Reserve Bank of New York and New York University issued by the National Bureau of Economic Research, technology-driven lenders have created efficiencies in the home lending business that give them an edge over traditional lenders. These fintechs are able to process loans quicker, can better handle movements in demand and have fewer loans that end up defaulting.
They are also gaining on their traditional brethren, with the study finding that fintech lenders' market share jumped to 8% in 2016 from 2% in 2010. In 2010, the fintechs originated $34 billion in mortgages. That stood at $161 billion as of the end of 2016. In terms of their ability to process mortgage loans, the research revealed that fintechs are doing so about 20% quicker than traditional lenders. What's more, the researchers found that around 25% of mortgages issued by fintechs defaulted, which is lower than the industry average.
During a conference call to discuss quarterly results, Bank of America's Chief Executive Brian Moynihan said that the fees no longer matter but that the mortgage lending business is still important, reported Bloomberg. He said that the bank still earns a lot of interest income from home loans since it is keeping more of them on its balance sheet instead of packaging them up and selling them to investors. That part of the mortgage business is largely non-existent today, noted Bloomberg.