How big banks stabilized mortgage income despite volume falling

Large financial institutions kicked off the earnings season with some early-year weakness in terms of the volume of housing finance activity, but there were some bright spots in their mortgage results.

Some of the margins on loans were higher in the first quarter, and that contributed to stabilized home lending income even at Wells Fargo, which announced an exit from the correspondent channel last year and saw a particularly steep drop in volume.

Gain-on-sale margins for mortgages improved for both Wells Fargo and JPMorgan Chase on a quarter-to-quarter basis and outpaced expectations, a report from Keefe, Bruyette & Woods stated.

Wells recorded a 287 basis-point consecutive-quarter GOS gain. While that may not be indicative of broader trends due to a particularly low number in the previous fiscal period and some other idiosyncrasies, JPMorgan Chase also noted an uptick, albeit by a more modest 83 basis points.

"The solid Q/Q margin increases were a bit of a surprise," Bose George, Alexander Bond and Thomas McJoynt-Griffith, analysts at KBW, said in an analysis of Wells Fargo, JPMorgan Chase and Citibank's earnings focused on their mortgage implications.

This trend may help to explain why even though Wells' originations dropped 22% from the previous quarter, home lending earnings were up, rising to $864 million from $839 million. The first-quarter number nearly matched the $863 million reported a year earlier.

The financial metrics suggest that while Wells' correspondent exit has cost it some volume, it is paying off in terms of refocusing the company on retail originations that have higher margins.

Loans originated by third parties like brokers or correspondents can help with volume in an interest-rate environment that's not conducive to refinancing like the current one, but those channels also tend to be susceptible to margin pressure in such a market.

JPMorgan Chase first-quarter numbers suggest it also may be adjusting its loan mix to move away from correspondent and put a little more emphasis on retail, although by no means has it been as aggressive as Wells. The former's retail share inched up to 67% from 65% on a consecutive quarter basis.

During that same period, JPMorgan Chase saw overall volumes slip by 8%. Correspondent volume dropped by 12% and retail fell by 6%. Net revenue from home lending rose to $1.19 billion from a little over $1.16 billion the previous quarter and $720 million a year earlier.

Citi's volumes rose by 11% on a consecutive-quarter basis that likely came from market share it gained from Wells Fargo's retreat, analysts said. The former company did not break out numbers for its smaller home lending business to the extent that Wells and Chase do, but noted there were "improved mortgage margins" in its retail banking segment.

Another bright spot for mortgages in the bank earnings was an improvement in valuations for mortgage servicing rights, presenting a contrast to write-downs seen at some companies in the fourth quarter.

JPMorgan Chase's MSR valuations rose by 1.8% and Wells' rose by 3% on a consecutive-quarter basis, with analysts at KBW noting that this was in line with expectations given interest rate changes during the period.

Citi's involvement in the MSR market has been relatively small since it sold off tens of billions of dollars in servicing back in 2017.