Bank 2Q mortgage production up 7%, but financials slip
July 15, 2021 11:37 AM
Bank lenders that have reported results so far saw higher mortgage production but lower financial returns in the second quarter.
"While volumes were largely consistent with industry expectations, the notable data point was the sharp decline in gain on sale margins," said Keefe Bruyette & Woods analyst Bose George. These banks that George covers — Wells Fargo, Bank of America, Citigroup and First Republic — followedthe pattern of JPMorgan Chase.
Mortgage originations actually increased by 7% bothquarter-to-quarter and year-over-year for those banks on average, although Citi did less business in the second quarter compared with three months prior.
The latest forecast from the Mortgage Bankers Association called for a4% industry-wide decline in originations from the first quarter.
Meanwhile, gain on sale margins have declined for the group, except at First Republic Bank, which saw a 90% quarter-to-quarter drop in secondary market sales.
"While volumes were largely consistent with industry expectations, the notable data point was the sharp decline in gain on sale margins," said Keefe Bruyette & Woods analyst Bose George. These banks that George covers — Wells Fargo, Bank of America, Citigroup and First Republic — followed
Mortgage originations actually increased by 7% both
The latest forecast from the Mortgage Bankers Association called for a
Meanwhile, gain on sale margins have declined for the group, except at First Republic Bank, which saw a 90% quarter-to-quarter drop in secondary market sales.
Lower servicing loss at Wells Fargo
Wells Fargo's second quarter mortgage banking income of $1.16 billion was down from $1.26 billion in the first quarter but well above the $256 million inthe second quarter of 2020. The year-ago period's results were affected by a $666 million net loss on its mortgage servicing business, which the bank cites as the main reason for the 352% year-over-year change in the segment's earnings.
In the most recent quarter, Wells Fargo reported a $76 million mortgage servicing net loss, which was an improvement over the first quarter net loss of $123 million.
Its mortgage servicing rights portfolio fell to $769.4 billion on June 30, versus $801 billion on March 31 and $989.5 billion at the end of the second quarter of 2020. Those MSRs had a carrying value of 87 basis points, compared with 94 bps for the prior quarter and 69 bps one year ago.
In the most recent quarter, Wells Fargo reported a $76 million mortgage servicing net loss, which was an improvement over the first quarter net loss of $123 million.
Its mortgage servicing rights portfolio fell to $769.4 billion on June 30, versus $801 billion on March 31 and $989.5 billion at the end of the second quarter of 2020. Those MSRs had a carrying value of 87 basis points, compared with 94 bps for the prior quarter and 69 bps one year ago.
But Wells shows strong origination results
The bank earned $1.23 billion on mortgage originations and loan sales in the second quarter, down from $1.38 billion in the first quarter but up from $922 million one year prior.
Compared with the second quarter 2020, "mortgage origination and sales revenue increased primarily due to higher gains from the re-securitization of loans we purchased from mortgage-backed securities last year and higher origination volume in our retail channel," Wells Fargo's earnings release said. "These increases were partially offset by lower gains on loan portfolio sales, lower correspondent origination volume, and lower net interest income primarily driven by lower loan balances."
Origination volume totaled $53.2 billion, up from $51.8 billion in the first quarter, but lower than the $59.2 billion produced in the second quarter of 2020.
Retail production was $36.9 billion, which was an increase from the first quarter's $33.6 billion and $30.5 billion a year ago. But correspondent purchases over the same time frame fell to $16.3 billion from $18.2 billion and $28.7 billion respectively.
Still, Wells Fargo reported a 13% quarter-to-quarter drop in gain on sale, compared with 32% at JPMorgan Chase. "However, we note that Wells Fargo's accounting (gain on sale recognized at close versus rate-lock like most lenders) means its trends may not yet fully reflect the sequential decline in profitability that we expect from other mortgage banking businesses this quarter," said KBW's George.
Compared with the second quarter 2020, "mortgage origination and sales revenue increased primarily due to higher gains from the re-securitization of loans we purchased from mortgage-backed securities last year and higher origination volume in our retail channel," Wells Fargo's earnings release said. "These increases were partially offset by lower gains on loan portfolio sales, lower correspondent origination volume, and lower net interest income primarily driven by lower loan balances."
Origination volume totaled $53.2 billion, up from $51.8 billion in the first quarter, but lower than the $59.2 billion produced in the second quarter of 2020.
Retail production was $36.9 billion, which was an increase from the first quarter's $33.6 billion and $30.5 billion a year ago. But correspondent purchases over the same time frame fell to $16.3 billion from $18.2 billion and $28.7 billion respectively.
Still, Wells Fargo reported a 13% quarter-to-quarter drop in gain on sale, compared with 32% at JPMorgan Chase. "However, we note that Wells Fargo's accounting (gain on sale recognized at close versus rate-lock like most lenders) means its trends may not yet fully reflect the sequential decline in profitability that we expect from other mortgage banking businesses this quarter," said KBW's George.
BofA's 2Q home equity volume doubles over prior quarter
Like Wells Fargo and JPMorgan Chase, Bank of America had higher quarter-to-quarter originations. Total volume for the second quarter of $20.7 billion topped the $15.2 billion originated in the first quarter, although it was down from the $23.1 billion produced one year ago.
Just over half of the first quarter volume, $11.5 billion, came from BofA's consumer banking segment. The remainder was originated through the global wealth and investment management segment, which works with BofA's affluent and high-net-worth clients.
BofA also originated $1.17 billion of home equity loans ($907 million by the consumer banking business) in the second quarter, more than double the $503 million in the first quarter, but well below $3.68 billion during the second quarter of 2020.
The bank had $2.34 billion of nonperforming residential first mortgages on June 30, down from $2.67 billion three months prior. One year prior, it had $1.55 billion of delinquent mortgages.
BofA does not break out mortgage banking income. However, in the consumer banking segment results, under consumer lending's "all other income line," the bank earned $29 million in the second quarter, down from $56 million in the first quarter and $40 million on a year-over-year basis.
Just over half of the first quarter volume, $11.5 billion, came from BofA's consumer banking segment. The remainder was originated through the global wealth and investment management segment, which works with BofA's affluent and high-net-worth clients.
BofA also originated $1.17 billion of home equity loans ($907 million by the consumer banking business) in the second quarter, more than double the $503 million in the first quarter, but well below $3.68 billion during the second quarter of 2020.
The bank had $2.34 billion of nonperforming residential first mortgages on June 30, down from $2.67 billion three months prior. One year prior, it had $1.55 billion of delinquent mortgages.
BofA does not break out mortgage banking income. However, in the consumer banking segment results, under consumer lending's "all other income line," the bank earned $29 million in the second quarter, down from $56 million in the first quarter and $40 million on a year-over-year basis.
Citi's origination volume drops from 1Q
Unlike the other large banks, Citi's mortgage production slipped between first and second quarters. It originated $5.6 billion in the second quarter, down from $5.7 billion the prior period and $6.4 billion the prior year.
In addition, Citi reported a severe drop in mortgage banking income. The $19.3 million of combined servicing and gain-on-sale earnings in the second quarter was down by 56% from $44.2 million in the first quarter and by 76% from $81.8 million in the second quarter 2020.
Citi has a servicing portfolio of $38.4 billion on June 30, down from $39.4 billion three months prior and $43.5 billion one year ago.
In addition, Citi reported a severe drop in mortgage banking income. The $19.3 million of combined servicing and gain-on-sale earnings in the second quarter was down by 56% from $44.2 million in the first quarter and by 76% from $81.8 million in the second quarter 2020.
Citi has a servicing portfolio of $38.4 billion on June 30, down from $39.4 billion three months prior and $43.5 billion one year ago.
First Republic's volume higher, but sells fewer loans
San Francisco-based First Republic Bank originated $8.7 billion of single-family mortgages in the second quarter, compared with $6.9 billion in the first quarter and $5.9 billion for the second quarter of 2020.
Its gain on sale margin for the second quarter was a remarkable 134 bps, compared with 71 bps in the first quarter and a loss of 37 bps a year ago.
However, secondary market activity was remarkably higher in the first quarter than the following three months.
First Republic sold just $4.3 million of mortgages in the just-ended quarter. But in the first quarter, it sold $43.5 million. During the second quarter of 2020 it sold $10.8 million.
When it comes to multifamily mortgages, First Republic originated $1.1 billion in the second quarter, up from $791 million in the first quarter and $946 million in the second quarter last year.
Its gain on sale margin for the second quarter was a remarkable 134 bps, compared with 71 bps in the first quarter and a loss of 37 bps a year ago.
However, secondary market activity was remarkably higher in the first quarter than the following three months.
First Republic sold just $4.3 million of mortgages in the just-ended quarter. But in the first quarter, it sold $43.5 million. During the second quarter of 2020 it sold $10.8 million.
When it comes to multifamily mortgages, First Republic originated $1.1 billion in the second quarter, up from $791 million in the first quarter and $946 million in the second quarter last year.
