Big Lenders Win from Both Sides

The third quarter marked another period of record results for the largest publicly traded mortgage lenders. But this time, it wasn't just loan origination that fueled strength in the mortgage sector.

A rare confluence of events - namely left over refinancing volume from the second quarter coupled with rising interest rates - allowed the nation's biggest lenders to achieve strong gains in the value of their mortgage servicing rights while still benefiting from big loan origination volumes in the third quarter. And suddenly top mortgage firms looked like the Kansas City Chiefs - strong on offense, strong on defense.

Rather than hedging each other, loan origination and servicing both added to the bottom line.

It's not clear how long the "perfect storm" of strong origination volume and improving values for mortgage servicing rights will last, however. With interest rates currently about 80 basis points above their low point in June, refinancing volume is rapidly slowing.

But most lenders still anticipate strong fourth-quarter lending volume, and they still have plenty of room to increase servicing values when they report fourth-quarter results.

Countrywide Financial Corporation reported that it's third quarter earnings grew to $1.1 billion in the third-quarter, more than four times the amount earned in the same period last year.

In a reversal from other recent quarters, Countrywide benefited from "impairment recovery."

The company reported impairment recovery of $231 million before tax in the third quarter, adding $1 per diluted share to earnings. Moreover, the company's impairment reserve stood at $1.7 billion at the end of September, suggesting that additional recovery could be booked in future quarters if rates remain stable or rise.

Countrywide earned $7.70 per share in the third quarter.

The nation's other big mortgage lenders reported similar results.

Wells Fargo also had a record breaking quarter, earning net income of $1.56 billion, or $0.92 per share.

Wells Fargo also noted significant gains from servicing in the third quarter. The company, which serviced $674 billion of home loans at the end of the quarter, reported that the value of its MSR portfolio increased from $3.8 billion at the end of the second quarter to $5.8 billion at the end of the third. The lender did not specify how much of that came in the form of impairment recovery. The company did say that higher mortgage servicing revenue reflects both the increased size and expected duration of its portfolio.

Moreover, the average note rate on its portfolio declined to an all-time record low of 5.98%.

"Given the record low note rate and increased duration of the servicing portfolio, we believe the servicing asset has tremendous value at today's interest rate levels," said Mark Oman, group executive vice president for home and consumer finance, in the company's quarterly earnings release.

Washington Mutual, the nation's largest servicer of home loans with a $765 billion portfolio at the end of the quarter, helped offset pipeline hedging problems in the third quarter with a $368 million gain from the recovery of impairment to its servicing portfolio.

At the end of the quarter, WaMu valued its MSRs at $5.9 billion, up from $4.6 billion at the end of the previous quarter.

For the third quarter, WaMu earned $1.03 billion, or $1.12 per share. That was up 10% from a year ago.

Tom Casey, chief financial officer of WaMu, said in a conference call with investors that WaMu's impairment recovery was "not quite at the level we had anticipated" in early September when interest rates were higher. However, it was still more than adequate to offset widely publicized problems in the hedging of WaMu's loan production pipeline that contributed to a management shakeup and a loss on loan sales.

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