Bank of America 2008 Annual Report Download - page 38

Mortgage, Home Equity and Insurance Services
MHEIS generates revenue by providing an extensive line of consumer real
estate products and services to customers nationwide. MHEIS products
are available to our customers through a retail network of personal bank-
ers located in 6,139 banking centers, mortgage loan officers in nearly
1,000 locations and through a sales force offering our customers direct
telephone and online access to our products. These products are also
offered through our correspondent and wholesale loan acquisition chan-
nels. MHEIS products include fixed and adjustable rate first-lien mortgage
loans for home purchase and refinancing needs, reverse mortgages,
home equity lines of credit and home equity loans. First mortgage prod-
ucts are either sold into the secondary mortgage market to investors,
while retaining MSRs and the Bank of America customer relationships, or
are held on our balance sheet for ALM purposes. MHEIS is not impacted
by the Corporation’s mortgage production retention decisions as MHEIS is
compensated for the decision on a management accounting basis with a
corresponding offset recorded in All Other. In addition, MHEIS offers
property, casualty, life, disability and credit insurance.
Effective July 1, 2008, Countrywide’s results of operations are
included in the Corporation’s consolidated results. While the results of
deposit operations are included in Deposits and Student Lending the
majority of Countrywide’s ongoing operations are recorded in MHEIS.
Countrywide’s acquired first mortgage and discontinued real estate portfo-
lios were recorded in All Other and are managed as part of our overall
ALM activities. For more information related to the Countrywide acquis-
ition, see Note 2 – Merger and Restructuring Activity to the Consolidated
Financial Statements.
MHEIS’s net income decreased $2.6 billion to a net loss of $2.5 bil-
lion compared to 2007 as growth in noninterest income and net interest
income was more than offset by higher provision for credit losses and an
increase in noninterest expense.
Net interest income grew $1.4 billion, or 74 percent, driven primarily
by an increase in average home equity loans and LHFS. The growth in
average home equity loans of $32.3 billion, or 44 percent, and a $5.5
billion increase in LHFS were attributable to the Countrywide and LaSalle
acquisitions as well as increases in our home equity portfolio as a result
of slower prepayment speeds and organic growth.
Noninterest income increased $4.2 billion to $6.0 billion compared to
2007 driven by increases in mortgage banking income and insurance
premiums. Mortgage banking income grew $3.1 billion due primarily to
the acquisition of Countrywide combined with increases in the value of
MSR economic hedge instruments partially offset by a decrease in value
of MSRs. For more information, see the mortgage banking income dis-
cussion which follows. Insurance premiums increased $1.1 billion due to
the acquisition of Countrywide.
Provision for credit losses increased $5.3 billion to $6.3 billion com-
pared to 2007. This increase was driven primarily by higher losses
inherent in the home equity portfolio, reflective of deterioration in the
housing markets particularly in geographic areas that have experienced
higher levels of declines in home prices. In addition, most home equity
loans are secured by second lien positions significantly reducing and, in
some cases, resulting in no collateral value after consideration of the first
lien position. This drove more severe charge-offs as borrowers defaulted.
For further discussion, see Provision for Credit Losses on page 81.
Noninterest expense increased $4.4 billion to $6.9 billion primarily
driven by the Countrywide acquisition.
Mortgage Banking Income
We categorize MHEIS’s mortgage banking income into production and
servicing income. Production income is comprised of revenue from the
fair value gains and losses recognized on our IRLCs and LHFS, and the
related secondary market execution, and costs related to representations
and warranties given in the sales transactions and other obligations
incurred in the sales of mortgage loans. In addition, production income
includes revenue for transfers of mortgage loans from MHEIS to the ALM
portfolio related to the Corporation’s mortgage production retention deci-
sions which is eliminated in consolidation in All Other.
Servicing activities primarily include collecting cash for principal, inter-
est and escrow payments from borrowers, disbursing customer draws for
lines of credit and accounting for and remitting principal and interest
payments to investors and escrow payments to third parties. Our workout
efforts are also part of our servicing activities, along with responding to
customer inquiries and supervising foreclosures and property dis-
positions. Servicing income includes ancillary income derived in con-
nection with these activities such as late fees and MSR valuation
adjustments, net of economic hedge activities.
The following table summarizes the components of mortgage banking
income:
Mortgage banking income
(Dollars in millions) 2008 2007
Production income
$ 2,119 $ 733
Servicing income:
Servicing fees and ancillary income
3,529 903
Impact of customer payments
(3,313) (766)
Fair value changes of MSRs, net of economic
hedge results
1,906 462
Other servicing-related revenue
181 –
Total net servicing income
2,303 599
Total mortgage banking income
$ 4,422 $1,332
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Bank of America 2008