Bank of America to Reap Mortgage Windfall: Analyst

NEW YORK (TheStreet) -- Bank of America (BAC) and SunTrust (STI) should see a "sizeable earnings benefit" from a recovering housing market, according to JPMorgan Chase analyst Vivek Juneja.

The analyst on Thursday said that "with home prices rising for the past few months," he expects major cost savings for the lenders, with reduced net loan charge-offs (NCOs), lower expenses related to repossessed real estate, and a decline in "other credit related expenses such as collections and servicing."

Juneja said that for combined residential loan losses, reposed real estate expenses and other credit expenses, "Bank of America and SunTrust are at the high end at 138% and 95% of 2Q12 EPS, respectively," and that a "5-20% further reduction in residential mortgage related NCOs and [repossessed real estate] expenses above expectations could add 3-7% to 2013 EPS for Bank of America and SunTrust."

"In addition, 10% reduction in other credit related expenses could add 2-5% to '13 EPS," he said. These expenses are particularly high for Bank of America, "with $2.5 bil of expenses led by its $1.2 tril servicing portfolio with 13.5% delinquency ratio," and "recovery in the housing market should reduce problem loans faster (and also staff)."

While banks are continuing to see a greatly elevated level of mortgage loan refinancing, mainly because of the Home Affordable Refinance Program, or HARP, which was expanded by President Obama expanded early this year, to allow qualified borrowers with mortgages held by Fannie Mae (FNMA) or Freddie Mac (FMCC) to refinance their entire loan balance, at today's low rates, no matter how far "underwater" the underlying property might be, following the collapse of housing values, Juneja said that home "purchase mortgage originations should rise with housing market recovery and continued increase in the cost of renting."

An increase in home purchase loan originations "will likely be offset by decline in refi volumes over time," he said, but "Wells Fargo (WFC) should be the biggest beneficiary with its large 40% market share of the purchase market and as the only bank in our [bank coverage] group with a substantially larger share of the purchase market versus refis." Under HARP 2.0, there is no loan-to-value ratio limit, where a lender originating a traditional first-lien mortgage loan would typically require the borrower to obtain costly private mortgage insurance, to protect the lender, if the loan is for more than 80% of the underlying home's market value.

Both Bank of America and SunTrust face large mortgage repurchase demands from mortgage-backed securities investors, with BAC seeing total mortgage putback claims rising 41% just in the second quarter, to $22.7 billion as of June 30.

Bank of America's shares closed at $7.95 Wednesday, returning 44% year-to-date, following a 58% decline during 2011.

The shares trade for 0.6 times tangible book value, and for nine times the consensus 2013 earnings estimate of 91 cents a share, among analysts polled by Thomson Reuters. The consensus 2012 EPS estimate is 55 cents.

Juneja rates Bank of America "Overweight," with a price target of $11.50.

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