Fitch: Weakening Mortgage Volumes Hitting US Banks' Top-Lines
CHICAGO -- April 15, 2013
An expected weakening of mortgage origination activity and applications for
loans is apparent in earnings reports from the largest U.S. banks, likely
pointing to a source of ongoing revenue pressure in U.S. mortgage banking this
year, according to Fitch.
During the first quarter, both JP Morgan and Wells Fargo reported sequential
declines in mortgage origination, applications, and the new loan pipeline,
with top-line mortgage banking pressure more evident at JPM, where net
revenues related to mortgage banking fell by $671 million year over year.
We expected mortgage volumes to continue falling in the quarter, particularly
as borrowers have already refinanced their homes or are still unable to
refinance because of housing values. Some shift in the mix of mortgage
originations, away from refinancing and toward new purchase loans, could
offset some of the volume pressure over coming quarters -- especially if the
housing market recovers at a somewhat faster pace. However, refinancing still
drives the lion's share of overall mortgage originations. Wells reported that
refinancing made up 65% of total applications in 1Q13, compared with 76% in
the year-earlier quarter.
JPM reported a decline in mortgage banking margins in the quarter, as gains on
sale declined. The margin for Wells remained near recent highs at 2.56% in 1Q,
but we expect some margin compression to occur this year, as mortgage revenue
declines outpace cost reduction.
Despite the volume pressure, asset quality trends for both banks improved
during the quarter, as net chargeoffs and nonperforming assets declined. At
Wells, the ratio of consumer chargeoffs to total loans fell to 123 bp, down 45
bp on a linked-quarter basis.
While unlikely to offset much of the declining origination volume, the
two-year extension of the administration's Home Affordable Refinancing Program
(HARP), announced on April 11, should spur some incremental activity through
2015. The HARP program allows borrowers that are underwater but current on
their mortgages to refinance if the loans were sold to Fannie Mae or Freddie
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