Losses on securities and derivatives backed by mortgages and other debt largely cancelled out fourth-quarter profits at Bank of America Corp. and Wachovia Corp, and left bond insurer Ambac Financial Group Inc. $3.26 billion in the red.

Bank of America said fourth-quarter profits fell to $268 million, compared with $5.26 billion a year ago. Profits for the year were also down 29 percent, to $14.98 billion.

Fourth-quarter results were “severely impacted by ongoing dislocations in capital markets and the slowing economy,” Chief Executive Officer Ken Lewis said in a press release, including $5.28 billion in write-downs of collateralized debt obligations (CDOs), complex securities used to finance mortgages and other debts.

Provisions for credit losses rose to $3.31 billion, more than double the level of a year ago and up 63 percent from the previous quarter. Bank of America also took an $800 million hit to its bottom line to insulate its money market investors from losses in investments in structured investment vehicles, or SIVs.

In a presentation to investors, Chief Financial Officer Joe Price said credit cards accounted for nearly 75 percent of losses in consumer lending, and that Bank of America has seen an increase in delinquencies in states most affected by housing problems.

Price said 30-day-plus credit-card delinquencies in California, Florida, Arizona and Nevada grew at a rate five times faster than the rest of Bank of America’s credit-card portfolio.

Charge-offs in home-equity loans grew to $179 million, or 63 basis points of loans outstanding, up from 20 basis points at the end of September, with 30-day delinquencies rising 25 basis points to 1.26 percent. Nonperforming home-equity loans also rose sharply, by 82 basis points, hitting 1.25 percent.

The percentage of home-equity loans with 90 percent or greater cumulative loan-to-value ratios (CLTV) increased from 17 percent in the third quarter to 21 percent of loans.

Despite an average “refreshed” FICO score of 721 and an average CLTV of 70 percent, Bank of America expects to see charge-offs in home-equity loans continue to rise given softness in real estate values.

“We increased reserves for this portfolio to 84 basis points but wouldn’t be surprised to see losses cross the 100-basis-point mark by the middle of this year as we work through higher CLTV vintages,” Price said.

On the plus side, first-mortgage originations were up 22 percent for the year, to $104 billion, with the bank’s No Fee Mortgage PLUS loan accounting for 16 percent of first-mortgage production in the fourth quarter.

Bank of America’s residential mortgage portfolio continues to perform well, Price said, with losses at only 4 basis points in the fourth quarter.

Price forecast mid-single-digit growth in lending in 2008, driven by commercial, credit card, home equity and unsecured loans.

“We are not in the recession camp, as we expect the economy to grow minimally and not contract, picking up momentum throughout the year driven by moderate growth in both consumer and business investment spending,” Price said. But he said some industries, like home building, and some states “may look or feel recessionary during 2008.”

Bank of America expects its $4 billion acquisition of Countrywide Financial Corp. to close early in the second half of this year. Because the acquisition is expected to have a “neutral” impact on earnings, Bank of America executives said their projections for 2008 excluded the addition of Countrywide.

Wachovia executives said the bank managed to eke out a $51 million fourth-quarter profit, despite $1.7 billion in write-offs on CDOs and a $1.5 billion provision for credit losses.

The bank would have lost $190 million for the quarter, if not for a $241 million income tax benefit from the lower tax rate Wachovia will pay — 29.3 percent — on lower-than-expected earnings of $6.31 billion for the year, down 19 percent from 2006.

In a report to investors, Wachovia said it originated $14.3 billion of consumer mortgages during the quarter, delivering $3.8 billion of that production to Fannie Mae, Freddie Mac and other secondary mortgage market investors.

Total nonperforming assets were up $2.2 billion from the previous quarter, hitting $5.2 billion, or 1.08 percent of loans. The 45-basis-point increase was driven by $1.2 billion in growth of nonperforming consumer real estate assets and a $770 million increase in nonperforming commercial real estate assets. The bank’s total consumer mortgage servicing portfolio was $193.1 billion at year-end.

Ambac Financial Group Inc. blamed a $3.26 billion fourth-quarter loss on a $5.2 billion write-down of credit derivatives. The write-down included an estimated $1.1 billion credit impairment related to CDOs of asset-backed securities (ABS) backed primarily by subprime residential mortgage-backed securities that the company downgraded internally to below investment grade.

Ambac executives said the company remains adequately capitalized to cover claims, despite a decision by analysts at Fitch Ratings to downgrade the company’s insurer financial strength rating from “AAA” to “AA” — a decision that could hamper the company’s ability to insure municipal bonds. Standard & Poor’s and Moody’s Investors Service have maintained their AAA ratings of the company, but warned of possible downgrades.

“We view the current perceptions of Ambac’s business by both the market and ratings agencies as underestimating Ambac’s strengths and future potential,” said Michael Callen, Ambac’s interim chief executive officer, in a statement. Callen said the company — which paid no claims related to its CDO of ABS portfolio in 2007 — had the ability to pay $14.5 billion in claims.

Fitch analysts said their Jan. 18 decision was based on projections that Ambac has a $1 billion capital shortfall, and Ambac’s decision not to attempt to raise additional capital.

During the fourth quarter, Ambac said it did not insure sure any new collateralized debt obligations of asset-backed securities, or subprime or second-lien residential mortgage-backed securities.


Send tips or a Letter to the Editor to matt@inman.com, or call (510) 658-9252, ext. 150.

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