Is mortgage lending back?

April 10, 2015 10:03 AM

U.S. bank earnings likely got a lift from mortgage lending in the first quarter, as lower rates spurred a surge in applications to refinance home loans, one of several glimmers of hope for a sector that has lately struggled with weak growth.

For the biggest U.S. banks, there were likely other boosts in the first quarter, including higher bond trading and underwriting revenue. The big banks start reporting earnings for the quarter next week, beginning with JPMorgan Chase & Co and Wells Fargo & Co on Tuesday.

Most are expected to post relatively big profit increases excluding one-time items, according to average analyst forecasts from Thomson Reuters after a year-ago period when results were depressed by weak mortgage and trading revenues.

Some of the most dramatic shifts for banks may be in mortgages, analysts said.

"The numbers are very strong. Mortgage banking revenue will probably be greater than people are expecting," said Paul Miller, an equity research analyst at The Federal Board of Revenue Capital Markets.

Falling borrowing costs helped drive the strength. The average 30-year mortgage rate fell as low as 3.63 percent in the first quarter of 2015, according to Freddie Mac's weekly mortgage market survey, reaching its lowest level since May 2013. That contrasts with last year's first quarter, when rates were edging higher, cutting into volume.

Interest rates fell as slower growth in Asia and Europe spurred investors to buy U.S. debt and investors pushed further into the future their expectations for when the Federal Reserve would start tightening.

With those declines, the Mortgage Bankers Association's index of applications to refinance mortgage more than doubled from the end of December through the middle of January. It takes time for those applications for home loans to close and turn into fees for banks, but at least some of those loans likely closed during the quarter, said analyst Chris Mutascio of Keefe, Bruyette & Woods.

Those that didn't close in time could also help second quarter results, he said.

Sharp cost cuts, including multiple layoffs, after mortgage volume fell nearly 40 percent last year, together with the spike in volumes, could translate into a profit windfall at some banks.

JPMorgan, the second biggest mortgage lender with 7 percent of 2014 loans, according to Inside Mortgage Finance, was among those cutting back sharply. The bank said in February that it had reduced its mortgage staffing in 2014 by 12,000 people, or 34 percent. Annual mortgage business expenses declined by $2.3 billion, or 30 percent.

Wells Fargo, the biggest mortgage lender with 14 percent of 2014 loans, and which has also cut costs, could benefit most from any rebound in new loans. In last year's first quarter, the company's mortgage banking revenue fell by nearly half from a year earlier to $1.5 billion, about seven percent of total revenue.


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David Henry and Dan Wilchins, Reuters