Mortgage bankers' first-quarter earnings should be down from the fourth quarter in tandem with the reduction in origination volume.

The negative consequences of increased competition for originations is likely to be offset by reduced hedging costs, with the result being a slight increase in gain-on-sale margins, a Keefe, Bruyette & Woods first-quarter mortgage industry earnings outlook report declared.

However, KBW expects a 27% decline in originations between the fourth quarter and the first quarter.

"The net effect should mean mortgage banking earnings are down about in line with mortgage volumes or a little less so. Several of the big banks reported, and results to date have been in line with the trends we are expecting for the industry. So we remain cautious on the mortgage banks," the report said.

In the fourth quarter, sharp increases in interest rates after the presidential election caused lenders to post large pipeline hedge losses. In contrast, rates were fairly steady in the first quarter and KBW analysts don't expect similar losses for the period when the publicly traded mortgage lenders it tracks report results.

And because rates remained flat, there should not be any significant hits to mortgage servicing rights valuations in the first-quarter results either, KBW added.

But because of the expected reduction in origination volume compared with 2016, KBW cut its earnings estimates on PennyMac Financial Services and Nationstar Mortgage. It did not revise the other four lenders it tracks: PHH Corp., Flagstar Bancorp (the only bank lender in the group), Walter Investment Management Corp. and Ocwen Financial Corp.

Flagstar has been an acquirer of mortgage companies in 2017, first picking up the delegated correspondent platform of Stearns Lending, and then the lending business of Opes Advisors.

"We think the bank will continue to grow, which should create value through earnings accretion," KBW said, although it did not revise its ratings on Flagstar.

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