Those firms, along with No. 3 U.S. Bancorp (USB) and fourth-ranked Bank of America Corp., may report $6.9 billion of mortgage-banking revenue in the period, a 37 percent increase from a year earlier, Christopher Kotowski, an Oppenheimer & Co. analyst, said in a research note. That will help the companies generate a combined $10.9 billion in profit, according to the average estimate of analysts surveyed by Bloomberg.
The figures show the degree to which U.S. lenders have become dependent on revenue from mortgages to cushion weakness in other lending and investment-banking businesses. The banks are benefiting as President Barack Obama’s administration targets housing in an effort to stimulate the economy. They’re earning more on each home loan they sell as Federal Reserve purchases of mortgage debt widen profit margins.
“Government policy is encouraging banks to make mortgages, and they want to keep it that way,” said Nancy Bush, an analyst and contributing editor at SNL Financial LC, a bank-research firm in Charlottesville, Virginia. “For them it’s sort of a beneficent cycle right now.”
Lenders are generating revenue as middlemen between government-controlled mortgage firms such as Fannie Mae and Freddie Mac, which provide about 90 percent of the funds to the housing market, and borrowers looking to take advantage of record-low interest rates.
The four banks will post $7.25 billion in mortgage revenue, according to estimates by KBW Inc.
Obama has pushed for more refinancing for homeowners underwater on their mortgages, and the administration last year broadened the Home Affordable Refinance Program, known as HARP, so that more people qualify. Almost 900,000 homeowners have used the program to refinance since 2009, according to the Federal Housing Finance Agency.
In all, consumers refinanced $305 billion of home loans in the three months ended Sept. 30, according to estimates from the Washington-based Mortgage Bankers Association. That’s the most since the fourth quarter of 2010, and a 52 percent increase from a year earlier, the group estimates. Refinancings accounted for 74 percent of the $412 billion in originations, the MBA said.
Central bank policy also is helping lenders. On Sept. 13, the Fed said it would buy $40 billion more in mortgage securities each month to stimulate the economy. The housing market is “one of the missing pistons in the engine” of the economic recovery, Chairman Ben S. Bernanke said at a press conference after the announcement.
“Housing is usually a big part of a recovery process,” he said. “We haven’t had that nearly to the usual extent. And to the extent that we can support housing, I think that would be a very useful outcome.”
The announcement, dubbed QE3 after two earlier efforts, pushed rates that already had reached historic lows to new depths. That helped increase lenders’ profit margins in the quarter, a trend that probably will persist, Ed Najarian, an analyst at International Strategy & Investment Group Inc. in New York, wrote in a Sept. 30 note.
The biggest banks benefit the most from the Fed’s actions because they have the largest pools of clients to approach for refinancing and already have customer information needed to underwrite loans, said Thomas Lawler, a former Fannie Mae economist who’s now a housing consultant in Leesburg, Virginia.
“They have more pricing power, and it comes down to what the market will support,” said Jennifer Thompson, a bank analyst at Portales Partners LLC in New York. “Banks are in the business of making money.”
Between the Fed’s announcement and Sept. 28, the last business day of the quarter, the rates offered for new 30-year mortgages fell by 0.10 percentage point, compared with a drop of about 0.28 percentage point for yields on the bonds into which the loans get packaged, according to data compiled by Bloomberg and Bankrate.com. The gap between the two, which typically signals increasing lender revenue when it widens, reached a record of more than 1.7 percentage points on Sept. 25.
“This is another form of a bailout,” said William Black, an associate professor of economics and law at the University of Missouri-Kansas City and a former U.S. bank regulator. “It transfers a whole lot more money to the banks than to people. It also gives homeowners more disposable income and potentially creates a wealth effect. The lower the interest rate, the higher home values should be. But in that transmission process, the banks will end up wealthier.”
Those same banks helped fuel the housing boom and subsequent financial crisis by easing underwriting standards and packaging defective loans into securities for sale to investors.
In February, the five biggest mortgage servicers agreed to a $25 billion settlement of state and federal probes into shoddy foreclosure practices. New York Attorney General Eric T. Schneiderman this month accused a unit taken over by JPMorgan of deceiving investors on the quality of mortgage bonds and said the industry faces billions of dollars in damages. The U.S. government yesterday sued Wells Fargo over claims the bank committed fraud by making reckless mortgage loans.
Mortgage-banking may account for 9.3 percent of third-quarter revenue at the four largest home lenders, up from 6.5 percent a year earlier, Oppenheimer’s Kotowski wrote in a Sept. 25 report. He estimated a record $2.95 billion for Wells Fargo, $1.85 billion for New York-based JPMorgan, $1.6 billion for Bank of America and $450 million for U.S. Bancorp.
Wells Fargo originated 33.1 percent of all U.S. mortgages in the first six months of the year, according to Inside Mortgage Finance, an industry publication. JPMorgan originated 11.1 percent; U.S. Bancorp, 5.4 percent; and Bank of America, 4.4 percent, according to IMF.
Lenders’ shares have rebounded in 2012 after last year’s declines amid signs that U.S. housing was improving. Bank of America surged 66 percent, U.S. Bancorp jumped 28 percent, Wells Fargo rose 28 percent and JPMorgan advanced 26 percent. The 24-company KBW Bank Index (BKX), which dropped 25 percent last year, has gained 29 percent in 2012. Housing prices bottomed earlier this year and have climbed since March, according to the S&P/Case-Shiller index of 20 U.S. metropolitan areas.
Some banks have said analysts are overestimating profits. Wells Fargo Chief Financial Officer Timothy Sloan said July 13 that reports saying margins on HARP loans were larger than other originations “wasn’t the case” and “isn’t the case now.”
There may be factors that erode or eliminate the impact of mortgage-banking revenue on profits. Expenses may climb, and income from mortgage bonds that lenders hold as investments may be curtailed if yields decline, analysts including Portales’s Thompson said.
Wells Fargo, which outlined a plan last year to cut $1.5 billion in quarterly costs by the end of the year, has stepped away from that goal as more revenue becomes available. The San Francisco-based bank added more than 2,000 workers in the second quarter, and Chief Executive Officer John Stumpf, 59, said on May 31 that “revenue still is king or queen” and that he “won’t be slavish” to the cost-cutting goal.
Wells Fargo’s Sloan told analysts last month that third-quarter net interest margin, the difference between what the bank makes on loans and pays for funds, may narrow by about the same as last year’s 0.17 percentage point.
“The drop in mortgage and MBS yields will lead to even more severe net interest margin pressure than previously anticipated,” Najarian wrote.
Still, mortgage banking is expected to help the largest lenders. JPMorgan, led by CEO Jamie Dimon, 56, will post a $4.87 billion profit for the quarter, according to estimates of 13 analysts surveyed by Bloomberg, an increase of 14 percent over the same period last year. Wells Fargo will report net income rose 19 percent to $4.83 billion, according to estimates of 14 analysts. Both firms report results Oct. 12.
U.S. Bancorp will post $1.43 billion in third-quarter net income, a 13 percent increase from a year earlier, according to 13 analysts surveyed by Bloomberg. The Minneapolis-based company will report results Oct. 17.
At Bank of America, revenue from the business may mitigate a $1.6 billion litigation expense the firm said it will take in the quarter after agreeing to pay $2.43 billion to investors who suffered losses tied to its purchase of Merrill Lynch & Co.
The bank will post a $276.3 million loss when it reports results Oct. 17, according to the estimates of seven analysts surveyed by Bloomberg. That compares with a $6.23 billion profit in last year’s third quarter driven by more than $6 billion in accounting gains tied to deterioration of its credit spreads.
Bank of America’s 2008 purchase of Countrywide Financial Corp., which made it the biggest mortgage lender and servicer as the bottom was falling out of the U.S. housing market, saddled the firm with more than $40 billion in costs tied to shoddy loans and foreclosures.
In response, CEO Brian T. Moynihan, 53, pulled back on originations to move employees into servicing delinquent borrowers and to reduce assets regulators deemed risky. In February, some Bank of America customers were asked to wait as long as 90 days before starting to refinance mortgages.
Moynihan, whose bank missed out on the surge in mortgage business this year, has said the firm’s market share will rise as it increases sales of home loans to existing customers.
“The banks have to generate profits” from somewhere, SNL Financial’s Bush said. “The housing market is one of the few bright spots.”