Lower Origination Volume Leads to Revenue Slump

A downturn in mortgage origination volume, offset in part by improved gain-on-sale margins, has led to a slump in mortgage banking revenue, according to a report from analysts at Keefe, Bruyette & Woods.

For the cohort of banks that KBW tracks, mortgage volume dipped 10% from last year to roughly $114 billion, according to the analyst note from Bose George and Chas Tyson. Banks in the group include Wells Fargo, JPMorgan, Bank of America, Citi, BB&T, PNC Financial, SunTrust, U.S. Bancorp and Fifth Third Bancorp.

Among the banks studied, some fared worse than others. Volume dropped year-over-year at PNC by 26.9% to $1.9 billion and at Citi by 21.4% to $12.6 billion. But mortgage volume actually rose slightly at U.S. Bancorp, increasing 0.7% from the first quarter of 2015 to $11 billion. And at Fifth Third, volume kept in line with its year-ago figure at $1.8 billion.

The KBW analysts cautioned, however, that origination trends could be more positive at nonbanks, given the ongoing shift in business away from banks. They did not provide figures for those institutions.

On a quarterly basis, higher gain-on-sale margins softened the blow from the lower volume for most institutions, the KBW analysts wrote. Gain-on-sale margins on average rose 11 basis points quarter-over-quarter, representing a 7% uptick. From this perspective, Wells Fargo, Bank of America and First Republic reported lower margins, while the gain-on-sale margin at Flagstar spiked 49.5%.

But when comparing gain-on-sale margins on a year-over-year basis, an entirely different picture emerges. From that perspective, margins fell across the board, with the average decrease standing at 44 basis points. Bank of America and PNC reported very big drops though by 110 basis points and 88 basis points, respectively.

Mortgage servicing rights valuations dropped as well, from both the fourth quarter and first quarter of 2015. At Sun Trust, for example, the value of servicing rights was 0.98% for the first quarter of 2016 versus 1.08% in the linked quarter and 1.09% in the previous year.

The decrease in MSR valuations came about as a result of lower interest rates. At the end of the first quarter, the 10-year U.S. treasury yield had fallen about 50 basis points from the start of the year. And Freddie Mac reported that average 30-year borrower rates had declined 30 basis points over the course of the quarter.

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