Taking Stock of Bank of America's Mortgage Business

Bank of America ( BAC ) recently announced its results for the second quarter. And the reported loss of nearly $9 billion - attributable completely to its mortgage business - has raised more questions about the actual exposure of the bank to the real estate market, which was previously thought to be under control. We have lowered our estimates for Bank of America in part due to the continuing uncertainty in its mortgage business. Bank of America competes with other major banking groups including JPMorgan Chase ( JPM ), Goldman Sachs ( GS ), Morgan Stanley ( MS ), Deutsche Bank ( DB ), UBS (UBS) and Wells Fargo (WFC).

In view of the latest earnings release, we have updated our price estimate for Bank of America's stock from just under $15 to near $10.90 . Our price estimate is around 10% ahead of the market price.

Uncertainty looms large over the mortgage business

Bank of America is still dealing with its legacy mortgage issues which have been a regular source of concern for the company over the last 3 years. In Q2, Countrywide issued legacy mortgage backed securities had to be settled by Bank of America with a group of 22 institutions for $8.5 billion. The quarter also saw the bank providing for a whopping $12 billion in other mortgage-related charges - a figure it indicates will take care of the entire uncertain portfolio of $424 billion.

We have captured the effect of these settlements on the bank's value through our estimate for fees earned by the bank represented as a percentage of its total mortgage loans.

Our analysis shows that the mortgage business now adds the least value to Bank of America's share price. But the company's substantial exposure to real estate portfolios still has the potential to hurt the company's value significantly - as we witnessed this quarter. The company's updating its estimates for possible losses from the remaining portfolio to $5 billion only makes things worse.

While the bank is working hard to modify the legacy loans with existing customers to avoid such huge write-offs in the future, it is definitely an uphill battle making us more cautious on our estimates.

See our full analysis of Bank of America

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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