Mortgage origination income goes in opposite direction at Chase, Wells

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Fourth quarter gain on sale margin moved in opposite directions at two of the nation's largest banks, falling 9% quarter-over-quarter at JPMorgan Chase, but increasing 25% at Wells Fargo.

While the decline was expected, the size was larger than anticipated given that Chase's share of higher margin retail mortgage originations rose, a report from Keefe, Bruyette & Woods analyst Bose George said.

In the fourth quarter, Chase originated $33.3 billion of mortgage, of which $16.4 billion was retail and $16.9 billion through correspondent purchases.

This compares with $32.4 billion in the third quarter, with $14.2 billion coming from retail and $18.2 billion correspondent. A year ago, Chase had $17.2 billion in volume, with retail providing $9 billion and correspondent $8.2 billion.

The Mortgage Bankers Association forecast a 5% gain in volume for the industry in the fourth quarter from the third, and the 3% increase at Chase was in line with that forecast, a report from Keefe, Bruyette & Woods analyst Bose George said.

Net production revenue totaled $327 million for the fourth quarter. In the third quarter, Chase reported $738 million, but there was a $350 million accounting adjustment so the amount to compare period results is $388 million, a drop of around 9%, George pointed out.

"The contraction likely would have been greater if the higher-margin retail mix had not increased to 49% from 44%," George said. "So overall, we would characterize the margin as coming in modestly below our expectations, though we expected it to directionally trend down as mortgage applications, which drive gain on sale revenue for most companies, trended down in the fourth quarter."

In the fourth quarter of 2018, Chase had a net production loss of $28 million.

Net servicing fee revenue was $147 million, compared with $148 million in the third quarter and $231 million in the fourth quarter of 2018.

In the fourth quarter, Chase had $474 million of mortgage income, compared with $886 million (which does not include the adjustment) in the third quarter and $203 million in the prior year fourth quarter.

For the full year, Chase's mortgage business earned $2.04 billion — $1.62 billion from originations and $417 million from servicing. In 2018, it earned $1.25 billion, of which $268 million came from originations and $984 million from servicing.

Total volume for the year was $105.2 billion, up from $79.4 billion in 2018.

It serviced $761.4 billion as of Dec. 31, compared with $774.8 billion on Sept. 30 and $789.8 billion on Dec. 31, 2018.

At Wells Fargo, mortgage banking income was $783 million in the fourth quarter, up from $466 million in the third quarter and from $467 million in the fourth quarter of 2018.

Net mortgage servicing income was $23 million, compared with a loss of $142 million in the third quarter, when the company had to take a valuation adjustment due to higher prepayment rates.

Unlike Chase, Wells had a quarter-to-quarter increase in gain on sale, rising to $760 million from $608 million. Wells’ held-for-sale mortgage loan originations increased to $42 billion from $38 billion in the third quarter and higher gains associated with exercising servicer cleanup calls in the fourth quarter, a press release said. In the fourth quarter of 2018, the gain on sale was $358 million.

Total originations, which included loans for its own portfolio, grew to $60 billion in the quarter, up from $58 billion in the third quarter and $38 billion in the fourth quarter of 2018. Wells Fargo originated $204 billion in 2019.

But for the year, Wells Fargo had lower mortgage banking income, $2.72 billion in 2019 versus $3.02 billion in 2018. The 33% increase in production income to $2.2 billion was more than offset by a 62% decline in servicing income to $522 million.

A third large bank that reported earnings, Citigroup, had fourth quarter mortgage income of $38.2 million, up from $32.9 million in the third quarter and $25.6 million in the fourth quarter of 2018.

Mortgage originations increased to $6 billion in the fourth quarter from $5 billion in the third quarter. In the fourth quarter of 2018, it did $2.3 billion.

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Earnings Stocks Bank stocks Originations Secondary market Servicing JPMorgan Chase Wells Fargo Citigroup
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