Government LendingMortgageOrigination

BofA’s mortgage biz ticks up in Q2, but regulatory headwinds are on the horizon

Mortgage volume totaled $5.9 billion during the Q2 2023, a 50.8% increase from the previous quarter

Bank of America (BofA), a top-20 U.S. mortgage lender, reported on Tuesday significant improvements to its home loan business in the second quarter of 2023, just as competitors JPMorgan Chase and Wells Fargo did late last week. 

But executives at all three banks expect some major regulatory headwinds. Rumors are that large banks would see residential mortgage capital requirements that far exceed international standards under the Basel III rules, which are expected to be unveiled on July 27, according to a report by Bloomberg.

“I think there’s been a desire to finish up Basel III,” Brian Moynihan, chair and CEO of BofA, said in a call with analysts. “From a global competitive standpoint, we’ve got to be careful here because the U.S. industry is the best industry in the world and actually does a lot of good for all the countries of the world, including the U.S. And frankly, the rules that are applied tend to be more favorable to those outside our country.”

Moynihan added: “They’ve [regulators] got to think through the downside of some of these rules, and that they could push stuff outside the industry to nonbanks that have the asset classes across the board. And nonbanks, including mortgage lending, which you referenced, half of it goes through nonbanks and those, the resilience of those institutions, is interesting to watch through cycles.”

According to Moynihan’s estimates, a 10% increase in BofA’s capital levels would prevent the bank from making about $150 billion of loans at the margin. BofA had an 11.6% CET1 ratio at the end of the second quarter of 2023, compared to the 10.4% current requirement.

Regulators have said big Wall Street banks might face a 20% average increase in overall capital requirements. Sources told Bloomberg that mortgage capital standards, which were not expected to change from the current 50% risk weight on first-lien residential mortgages, would change to 40% to 90% for large banks, with higher loan-to-value ratio loans receiving higher risk weights. 

Mortgage, home equity business 

The new rules would affect BofA’s mortgage originations, which totaled $5.9 billion during the second quarter of 2023, a 50.8% increase from $3.9 billion posted in the first quarter but still, a 59% drop from the $14.4 billion originated in the second quarter of 2022. 

BofA’s sequential production increase follows that of JPMorgan Chase and Wells Fargo, which also posted higher mortgage volumes during the second quarter. It suggests the first quarter of 2023 may have been the bottom of the current cycle, when rates surged to 7%. 

BofA also originated $2.54 billion in home equity loans in the second quarter, compared to $2.60 billion in the previous quarter and $2.53 billion in the same period last year. 

Bank of America had $228.7 billion in outstanding residential mortgages on its books through June 30, down from $229.2 billion from Q1 2023 and flat from the second quarter of 2022.

The home equity portfolio was $25.9 billion at the end of the second quarter, down from $26.5 billion from the previous quarter — and a decline from $$27.8 billion a year prior.

Bank of America’s total mortgage-backed securities reached a $30.8 billion fair value as of June 30, compared to $32.1 billion as of March 31, 2023.  

Overall, the bank posted a net income of $7.4 billion from April to June, declining 8.6% quarter over quarter and climbing 19.3% year over year.

Deposits at Bank of America were $1.87 trillion in the second quarter of 2023, down from $1.91 trillion in the previous quarter and $1.98 trillion during the same quarter in 2022. 

The consumer banking division posted a net income of $2.85 billion, a decline from the previous quarter’s $3.1 billion and the previous year’s $2.88 billion, according to its filing with the Securities and Exchange Commission (SEC).

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