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How the heck does Bank of America make their money?!?
Old 10-29-2010, 10:55 PM   #1
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How the heck does Bank of America make their money?!?

I sure hope they're getting a lot of credit-card interest, because it's difficult to see how the mortgage side is contributing to the bottom line.

In March 2009 we refinanced our rental property. This happened as a fluke when our mortgage broker (who's become a good friend with our serial refinancings) pointed out that BofA was only asking 4.625% for their investor loans. When NFCU refused to modify their 5.5% loan terms, we kicked them to the curb and went with BofA.

If I'd ever been a BofA investor, the refinancing process would have concerned me about their alleged revenue model. Back in 2009 (and perhaps still today) every BofA mortgage applicant got a 70-page bound 8.5"x11" one-pound disclosure book warning them of all the characteristics of every one of BofA's loans. This was sent through the snail mail at first-class postage rates, not handed out by the broker or e-mailed or downloaded. They made no attempt to limit the disclosure to the actual loan we'd applied for but rather had you wade through pages of boilerplate about ARMs and HELOCs when all you wanted was a 30-year fixed. At the end was an intimidating acknowledgment to be immediately signed and returned or BofA would never trust you with their money. (It was supposed to be submitted with our application, but nobody wanted it because we applied online. Our mortgage broker thought it was pretty funny, too.) But, hey, credit was tight and mortgage banks were skittish, so we bit our tongues and submitted all the paperwork they asked for.

At some point BofA asked for setup info on our taxes/insurance escrow account. When I declined the honor they said that they'd charge an extra 0.25% mortgage interest if we didn't let them pay our property taxes & insurance. I haven't been forced to fund an escrow account for over 20 years but, hey, credit was tight and banks were skittish.

Once we got the loan we set up automatic monthly billpay through our NFCU account. It took me at least six months to get BofA to shut off the snail-mail assault of payment coupons, mailers, and other upselling. Even today we get monthly e-mail notifications that our mortgage payment is due, and another monthly e-mail notification that it's overdue (it doesn't interface with NFCU's billpay software). But at least they're getting their money when they want it.

Today we got a four-page (first-class) letter explaining the concept of "escrow analysis". For the last year they've been maintaining roughly a $1000 balance in the escrow account, and this month they've discovered that it's a little higher than necessary. After four pages of explaining their process, they concluded that they'd be lowering our monthly payment by $7.59 and sending us a $77.67 rebate check. Note that the check will be hardcopy via snail-mail instead of an EFT to the account they've been getting our payments from. Any bets on whether that $7.59 adjustment triggers another hailstorm of snail-mail payment coupons, mailers, and upselling inserts?

I don't have a financial MBA and I'm not a highly-paid banking exec, but I can do math. Let's pretend that those fiscal geniuses have been scarfing a 3% spread off our escrow account. (I'm skeptical, but it's a nice round number.) That entrepreneurial initiative has earned them $30 in 12 months. Over the last year they've wasted at least $15 in first-class postage to send me a couple dozen unwanted pieces of snail mail, and I'm sure they sent another three hardcopy checks for our property taxes and insurance. All of these addressees (including me) handle electronic payments but that's apparently "too hard". (That's assuming they pay the insurance company up-front, which they seem to do, although I used to spread the payments out over six months.) Then, instead of tightly clutching the remaining $15 in their hot little hands (or perhaps disbursing some of it as a dividend to their overly patient shareholders) they developed an accounting system to conduct four-page escrow analyses which would force them to adjust their payments by less than 1% as well as spewing out another hardcopy snail-mail check. Do they think that their software programming, installation, maintenance, & upgrade costs are less than $15 per account?

Perhaps they make it up on volume.

If you're a Bank of America stockholder then I hope you're getting a really good dividend yield... and this time they're not going to cut it!

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Old 10-30-2010, 03:09 AM   #2
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thought all the banks were now making it the old fashioned way: borrowing from the fed at zero and then buying govt debt earning 1%-3%; this, along with a number of other anomalies, indicates to me that we are a far, far way from a normally functioning financial system/economy.
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Old 10-30-2010, 06:17 AM   #3
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Originally Posted by JBmadera View Post
thought all the banks were now making it the old fashioned way: borrowing from the fed at zero and then buying govt debt earning 1%-3%
That's the way it appears.
Living an analog life in the Digital Age.
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Old 10-30-2010, 06:32 AM   #4
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Originally Posted by JBmadera View Post
thought all the banks were now making it the old fashioned way: borrowing from the fed at zero and then buying govt debt earning 1%-3%; this, along with a number of other anomalies, indicates to me that we are a far, far way from a normally functioning financial system/economy.
Not only that, but the Fed, through "quantitative easing", is purchasing the securities to make sure the banks don't lose what they are gaining on the spread (plus more?) from the duration mismatch.
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Old 10-30-2010, 06:34 AM   #5
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we're with citi and we get the same thing...although we never got the big book.

as far is escrow is concerned, they let us out the insurance part, but not the taxes. funny thing is, they estimated our taxes would be about half of what they are. so, after they paid the tax man, up went the escrow payments. i thought it would be a battle to get out of the account, so i called in june to get the process rolling. a couple clicks on the keyboard and a few minutes on hold and letter arrives 2 weeks later. all we have to do is sign on the dotted line and we're out of the escrow. but, since they can't calculate our tax burden correctly, they are essentially loaning us money for free. i'll let it ride until we are paid up (maybe next year depending on if they can calculate it correctly). i at least learned what the criteria is for getting out of the escrow....
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Old 10-30-2010, 09:23 AM   #6
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Their borrowing costs are for all essential purposes zero making their net interest margin still very high. On top of that they're earning servicer fees on the loan itself. They also surely get a volume discount on the postage obviously

I have an almost totally oposite experience with their auto loans. We took out a loan for my wife's car last fall. Did everything on the website and got approved. They called the dealer and worked out the details. Totally smooth, although we have been unable to stop the barrage of credit card and other offers.
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