Where can banks generate earnings leverage in the new, ever-more-regulated Dodd-Frank world? For starters, by spending less on dealing with delinquent mortgages as the housing mess winds down:
The chief executives of JPMorgan Chase & Co and Bank of America Corp, the two biggest U.S. banks, said this month their rate of spending to handle troubled mortgages had topped out and should begin to decline soon with falling delinquency rates. . . .
With fewer problem loans to process, the banks could reduce the army of back-office staffers who handle the paperwork and phone calls required by foreclosures. . . .
JPMorgan nearly tripled its staff over three years to 20,000 people. “That number has probably peaked, and I think you will see it coming down over the next couple years,” JPMorgan Chief Executive Jamie Dimon told analysts who questioned him about expenses after the company reported lower fourth-quarter profits.
Dimon forecast that two-thirds of the $925 million of expenses JPMorgan incurred to service mortgages in the quarter will go away. [Emph. added]
So a wind-down could save $620 million per quarter, or around $2.5 billion per year. Even for JPMorgan Chase, that counts as a lot of money. Bank of America is looking at even bigger savings:
Bank of America is working off a mountain of mortgage problems left from its 2008 purchase of subprime lender Countrywide Financial. It now has about 32,000 workers handling delinquent or other at-risk mortgage loans, more than six times the staff it had in 2008. The bank spent $2 billion in the fourth quarter, excluding litigation costs, on the issue.
Chief Executive Brian Moynihan said that over time that spending will be reduced to $300 million per quarter, even taking into account stricter servicing regulations faced by banks.
That implies annual savings for BofA of $6.8 billion. Reminder! The incremental margin on reduced expenses is very, very high. . . .