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Short-Term Mortgage Pain Is Long-Term Gain for Banks

The analyst estimates that Wells Fargo's quarterly banking revenue will decline slightly during the first quarter, eventually sliding to $2.2 billion, with total mortgage revenue declining by roughly $1 billion year-over-year to $10.7 billion. Staite expects a sharper drop in Wells Fargo's mortgage revenue in 2014, to $8.4 billion.

But the improving economy and housing market, along with share buybacks, will more than offset the decline in mortgage revenue, according to Staite. The analyst says Wells Fargo's earnings per share will increase from $3.36 in 2012 to $3.77 in 2013 and $3.91 in 2014.

Staite reiterated his "neutral" rating on Wells Fargo, with $38 price target, and said he prefers Bank of America "as a better play on a recovering housing market."

For Bank of America, improving credit quality means an eventual reduction in mortgage putback claims against the company and loan-servicing expenses. Mortgage repurchase claims totaled $28.3 billion as of Dec. 31, increasing from $12.6 billion a year earlier. The company on Jan. 7 announced the settlement of its very long-term dispute with Fannie Mae, and also announced a major sale of mortgage-servicing rights.

Investors clearly were seeing light at the end of Bank of America's mortgage tunnel during 2012, sending the company's shares up 110%. The shares closed at $11.48 Monday, down slightly so far this year.

Staite rates Bank of America "overweight," with a $12 price target, and said after the announcements on Jan. 7 that the sale of mortgage-servicing rights "is positive as it will accelerate the reduction in abnormal legacy asset-servicing costs, thus boosting ... profitability."

The analyst estimates that Bank of America will earn $1.23 a share in 2013, with EPS increasing to $1.53 in 2014.

-- Written by Philip van Doorn in Jupiter, Fla.

>Contact by Email.

Philip W. van Doorn is a member of TheStreet's banking and finance team, commenting on industry and regulatory trends. He previously served as the senior analyst for Ratings, responsible for assigning financial strength ratings to banks and savings and loan institutions. Mr. van Doorn previously served as a loan operations officer at Riverside National Bank in Fort Pierce, Fla., and as a credit analyst at the Federal Home Loan Bank of New York, where he monitored banks in New York, New Jersey and Puerto Rico. Mr. van Doorn has additional experience in the mutual fund and computer software industries. He holds a bachelor of science in business administration from Long Island University.
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