When it comes to residential finance and the nation's megabanks, the second quarter was a case of “the bigger they are, the more they suffer” with glimmers of hope here and there.
Wells Fargo, Bank of America and JPMorgan Chase—which tend to rank one, two and three, respectively, in terms of home originations—saw their loan volumes clipped in the second quarter as rising rates and concerns about employment and home values reduced applications.
Wells Fargo funded $64 billion of single-family loans during the second quarter, a 26% drop from the first quarter and a similar decline from the same period a year ago. JPM's fundings fell a more benign 13% on a sequential basis.
But no bank suffered more than B of A, which originated just $41 billion of home mortgages during the quarter, its lowest reading in several years.
The residential finance division of B of A also posted a stunning loss of $13 billion in the second quarter as delinquent mortgages, expected legal settlements and charges tied to “reps and warranties” on loans sold into the secondary market hammered its performance. (Most of its legacy problems are tied to the 2008 purchase of Countrywide Financial Corp.)
In the same quarter a year ago the bank's mortgage business earned $1 billion.
The residential finance and servicing business of the bank is housed in its consumer real estate division which lost $14.5 billion overall, compared to a loss of $1.5 billion in the second quarter of 2010.
Last fall B of A exited the wholesale channel, which reduced its capacity to fund new loans. Since then it has concentrated on retail and correspondent purchases, although in recent months rumors surfaced that the bank might exit the latter channel as well. However, last week B of A officials cleared the air on correspondent, saying it had no plans to stop buying closed loans.
A bank spokesman told NMN that B of A will continue its correspondent lending program, despite the company's emphasis on retail mortgage lending. "We have been able to leverage our platform through correspondent lending to drive incremental earnings. We have no plans to change this approach," said spokesman Dan Frahm.
Still, during a second-quarter conference call last week, CEO Brian Moynihan stressed the importance of retail originations, noting that its consumer mortgage business is focused on better serving the bank's customer base. "That's how we are going to run the business—to benefit our customers, making sure every ounce of capital is used to support that core customer base,” he said.
JPMorgan Chase, too, is focusing heavily on retail. Although total production fell by 13%, retail was down just 6%. JPM bought $10.3 billion of loans from correspondent sellers, down 24% from the prior quarter—but off 60% from the fourth quarter. (JPM exited wholesale production two years ago.)
The bank's mortgage/auto/consumer unit lost $454 million in the second quarter, a weak showing, but better than the $937 million it dropped in the first quarter.
Most of the losses at B of A and JPM can be traced to writedowns on their mortgage portfolios, though the rate of problem loans is finally easing. Wells, for instance, showed improvements in residential charge-offs, taking $2.8 billion of hits, compared to $3.2 billion in the first quarter.
As for the origination outlook, it appears that despite the terrible news of second-quarter loan volumes may be increasing once again, thanks to falling rates. Wells reported that its pipeline of unclosed mortgages totaled $51 billion at the end of June, compared to $45 billion at the end of March.
Wells' mortgage banking division, Wells Fargo Home Mortgage, posted non-interest income of $1.6 billion in the quarter, down $397 million from the first quarter.
