Orlando Sentinel

Bank of America to take $1B hit
It joins other banking giants affected by the mortgage meltdown.

Richard Burnett, October 9, 2007

The nation's credit crunch shows no sign of letting up as major mainstream banks continue to ax billions of dollars from their assets as a result of the mortgage meltdown, industry experts said Monday.

In the latest round, Bank of America is expected to absorb a charge-off of $1 billion in its upcoming earnings statement, according to estimates by a senior industry analyst.

The Charlotte, N.C.-based bank -- Florida's largest and Central Florida's third-largest -- is projected to lose $700 million from its leveraged home loans and $300 million in direct mortgage write-downs, Sanford Bernstein analyst Howard Mason told The Financial Times.

Bank of America plans to announce its third-quarter earnings Oct. 18.

Figures also indicate JPMorgan Chase will take at least $2 billion in mortgage-related charge-offs in its upcoming quarterly report, the analyst said.

The latest estimates would bring the total to nearly $22 billion in asset write-downs so far this year for the nation's banks as they absorb fallout from rising home-loan defaults, especially troubled subprime mortgages held by customers with credit-history problems.

The so-called subprime meltdown, which began with scores of subprime borrowers going out of business, has spread to mainstream banks, many of whom invested in mortgage-backed securities that included subprime home loans.

Big banking losses -- coupled with regulatory pressures -- will mean borrowers can expect banks to continue to be stingier than in the past few years when it comes to loan-approval standards, finance experts said.

"In the short term, everyone's knee-jerk reaction will be to tighten up on granting credit," said James Gilkeson, a finance professor at the University of Central Florida and former federal banking regulator. "But really that just means a return to what would be called prudent underwriting. There were obviously some pretty weak practices out there in recent years."

Though they agree the shakeout is necessary, some bankers warned that the solution may be causing more problems in the process.

"There are a lot of problems now with the mortgage market raising the bar so high that fewer really eligible people are qualifying for mortgages," said Alan Rowe, president of Orlando-based First Commercial Bank of Florida. "Nobody disputes that the process had gotten too lax. Now I'm concerned the pendulum has swung too far in the other direction. We're hearing a lot of people are having to walk away from contracts because they can't get approved."

Despite the massive write-offs so far this year, Rowe said he doesn't foresee it reaching a crisis threat. "Clearly it involves a lot of dollars, but that's all relative to the huge size of these major institutions," he said. "There's a general feeling that they're just being very conservative and taking charges for everything that might remotely be a problem."

But some analysts were not convinced that the banks won't take more serious hits in the next year or so.

"The question is whether they are being overly aggressive with these charges now, with some chance of them making some good recoveries later," said Kris Niswander, a senior industry analyst for Virginia-based SNL Financial, a stock-research firm. "Or will we see these losses continue to unwind and extend into other lines of business."

The housing meltdown has also had a ripple effect on the financial lives of many borrowers, said Robert Manning, a consumer-finance expert and author of Credit Card Nation.

"There's a double financial bubble," said Manning, a native of Leesburg and humanities professor at the Rochester Institute of Technology. "First, there was the incredible run-up in housing values that pushed banks to encourage people to get into greater credit-card debt and refinance it back to their home. After that bubble popped, it has left a lot of people with the second bubble of huge credit-card interest rates."

Richard Burnett can be reached at rburnett@orlandosentinel.com or 407-420-5256.


This story ran on Orlando Sentinel on October 9, 2007.