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Stress Tests: How Will Mortgage Loans Impact Bank Losses?

stress testMortgage loans are likely to make up for a very small portion of the loan losses under the Supervisory Severely Adverse Scenario of the Bank Stress Tests under the Dodd-Frank Act.

Three of the nation’s largest banks—Bank of America, JPMorgan Chase, and Wells Fargo—that released their stress test results on Friday showed that if things did indeed go south, credit card debts would rack up some of the biggest losses for them.

Bank of America’s results revealed that of a total of $39.2 billion in losses from loans first lien mortgages as well as junior liens and domestic home equity lines of credit (HELOCs) would make up just $3.5 billion each. Credit card debts would make up for the largest chunk of losses at $11.7 billion, followed closely by commercial and industrial loans that would consist of losses worth $11.2 billion.

The scenario at Wells Fargo was quite similar with first lien mortgages as well as domestic junior liens and HELOCs contributing only $3.1 billion and $2.1 billion to the total projected loan losses of $33.5 billion. At Wells Fargo, the domestic commercial real estate loans made up the largest chunk of losses at $8 billion, followed by credit card losses at $6.3 billion.

Of the total loan losses of $42.5 billion projected at JPMorgan Chase under severely adverse scenarios, $2.2 billion and $1.5 billion would be contributed by losses from first lien and HELOCs respectively. Credit card losses made up for the biggest share at $22.3 billion, followed by commercial and industrial loans.

The small amounts of losses in mortgages projected by these banks also signify a shift away from mortgage lending among the big lenders. According to recent data by the Bureau of Consumer Financial Protection, nonbanks (lenders who don’t take deposits) now originate 56 percent of all home loans.

In fact, a recent report on CNN, citing the bureau’s data, said that the “biggest mortgage lender in the country isn’t a bank at all.” Quicken Loans, a nonbank, originated 27 percent more mortgage loans in 2017, than its nearest competitor, Wells Fargo.

About Author: Radhika Ojha

Radhika Ojha, Online Editor at the Five Star Institute, is a graduate of the University of Pune, India, where she received her B.A. in Commerce with a concentration in Accounting and Marketing and an M.A. in Mass Communication. Upon completion of her master’s degree, Ojha worked at a national English daily publication in India (The Indian Express) where she was a staff writer in the cultural and arts features section. Ojha also worked as Principal Correspondent at HT Media Ltd and at Honeywell as an executive in corporate communications. She and her husband currently reside in Dallas, Texas. You can contact her at Radhika.Ojha@theMReport.com.

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