Half a loaf from Wells Fargo (WFC) Friday morning. The bank reported first quarter earnings of 75 cents a share. That was 3 cents a share above Wall Street estimates and a 12% increase from the 67 cents a share that the company earned in the first quarter of 2011. (Earnings were bolstered by $400 million release from reserves against bad loans in the quarter.) Revenue climbed—a novelty in the banking industry lately—by 5% from the first quarter of 2011 to $21.64. Wall Street analysts were expecting $20.5 billion in revenue.

But the strength of the story this quarter really depends on what part of Wells Fargo you looked at.

The mortgage business went great guns in the first quarter with the bank originating  $129 billion in mortgages. That was an increase of 7.5% from the $120 billion originated in the fourth quarter and a 54% increase from the $84 billion originated in the first quarter of 2011. This is the kind of performance from the bank’s mortgage unit that investors who have bid up the shares 24% for 2012 through the April 12 close were expecting. Wells Fargo’s mortgage business should be taking advantage of a retreat in the mortgage market from competitors such as Bank of America (BAC)—and it is.

The bank’s lending business wasn’t anywhere near that strong a story. Read more

Four financial companies actually fail the Federal Reserve’s stress test

The Fed speaks: Lots of surprises.

In contrast to the don’t disturb the waters statement from the Fed’s Open Market Committee earlier in the day on interest rates and the U.S. economy, the Fed’s 4:30 p.m. (New York time) announcement of the result of its annual stress test of 19 big U.S. financial institutions blew a couple of smoking holes in the banking sector.

Yes, 15 of the 19 financial companies tested passed. They’ll now be able to increase share buy backs and dividends. In fact, JPMorgan Chase (JPM) has already announced that it will increase its quarterly dividend to 30 cents a share from 25 cents a share. (Record date for that dividend is April 5.)

But four financial companies failed and won’t be allowed to increase their dividends or buyback plans. And from the market’s reaction in afterhours trading nobody was expecting those results. Read more

Big U.S. banks are leading the U.S. stock market down today.

The driver here isn’t simply the prospect of slower economic growth represented by the lack of any job growth in August data released today—although that certainly doesn’t help.

Bank stocks are reeling because the big U.S. mortgage lenders and mortgage packagers are reportedly facing a suit be filed next week from the Federal Home Finance Administration, the agency that represents Fannie Mae and Freddie Mac, seeking to force these financial companies to repurchase bad mortgages. The amounts at stake, and it’s extremely hard to put a dollar figure on this suit, could dwarf the $20 billion sought in a suit brought by the nation’s states attorneys general. Fannie Mae and Freddie Mac own about $227 billion of the so-called private label mortgages that are the subject of this suit. (Bank of America probably faces the biggest exposure since it sold the most of these private label mortgages to Fannie Mae and Freddie Mac.)

No surprise then that Bank of America (BAC) was down 8.7% as of 3:30 p.m. New York time, JPMorgan Chase (JPM) 4.7%, Goldman Sachs Group (GS) 5%, Citigroup (C) 5.1%, and Wells Fargo 4.5%.

The suit would be the result of 64 subpoenas issued last year to originators and servicers of mortgage-backed securities. The statute of limitations is due to expire next week so the Federal Home Finance Administration has to file or forever hold its piece.

The subpoenas and the likely suit focus on so-called private label mortgage-backed securities originated by mortgage lenders, packaged by Wall Street investment companies, and then sold to investors. Fannie Mae and Freddie Mac were permitted to buy slices of these securities that carried AAA ratings. As of the end of July, the two companies, now owned by taxpayers, held nearly $78 billion and $149 billion in such securities.

Private label mortgage-backed securities have been among the worst performing mortgage-backed assets, showing the kind of losses nobody expects from AAA-rated securities. The likely suit would allege that the banks in question misrepresented the content of the mortgage pools when they packaged them and sold them to Fannie Mae and Freddie Mac. Testimony in front of the Financial Crisis Inquiry Commission showed that a large percentages of mortgages included in mortgage-backed securities deals had received inadequate due diligence and that the big Wall Street investment companies ignored those problems and packaged them in the mortgage pools anyway.

A suit from the Federal Housing Finance Agency would be a nightmare for the big mortgage banks not just because of the sums involved, but because it would also pretty much blow up all other efforts to put together settlements that would cap bank liabilities. Forget about the proposed settlement with state attorneys—a settlement already in danger. And it would almost certainly bring other investors into court demanding that banks buy back their mortgage paper too.

But the effects don’t stop there. Read more

Tomorrow’s Bank of America earnings release spooks bank stocks today

Be afraid. Be very afraid.

Of Bank of America’s (BAC) earnings report for the first quarter of 2011 scheduled for release tomorrow, April 15, before the market opens in New York.

Worries about what the bank will say tomorrow are, in my opinion, what sent bank stocks down in today’s session. Today JPMorgan Chase (JPM) dropped 2.8%. Wells Fargo (WFC) fell 1.7%. And Bank of America itself was down 1.1%.

Wall Street analysts are expecting the bank to report net income of $2.87 billion for the quarter. That would be up very slightly from the $2.83 billion in net income in the first quarter of 2010.

I think, as with JPMorgan Chase, that Bank of America could actually beat on the earnings line thanks to the release of reserves against bad loans.

But the likelihood is that the revenue line will be ugly. Really ugly. Read more

Add another word to English as spoken on Wall Street: robo signer.

These are the folks at banks and mortgage servicing companies who signed hundreds of foreclosure documents a day. Frequently they didn’t read them at all. Even more frequently they didn’t bother to check that the financial information in the foreclosure documents was accurate or that the financial company bringing the foreclosure could even prove that it had actually owned the mortgage in question and had the legal right to foreclosure. 

But the robo signers signed away putting their signatures on a line that said they had reviewed the documents for accuracy.

The result is a virtual national moratorium on mortgage foreclosures and an investigation by every single state attorney general—yep, all 50 of them—into the mortgage servicing industry.

According to FBR Capital Markets, losses for banks and other mortgage servicing companies from the moratorium could run to $6 billion to $10 billion and stretch out for at least four or five years.

Ah, if only that was the biggest bill hanging over the U.S. banking industry. But it’s not. Potentially. There’s this little problem called “put-backs.” That could be much bigger. No one knows how much bigger or who owns how much of it. And that’s a huge issue for investors since we all know how much Wall Street likes uncertainty.

How much bigger? Read more