4 factors threatening mortgage banking
Will mortgage volumes hit, miss or beat $1.1 trillion estimate?
As lenders continue to dish out their earnings reports, the results are proving to be more of the same — lackluster loan growth, especially with mortgages — according to a recent FBR Capital Markets report.
“With the 10-Year Treasury falling pretty meaningfully in the quarter, margins continued to experience some modest pressure and average earning asset growth was decent but not overly impressive as banks continue to grow deposits at a generally faster rate than higher-yielding loans given strong competition and a lack of consumer demand,” the report stated.
In the current earnings season, Wells Fargo (WFC) reported record net income of $5.9 billion, up 14%, or $1.05 per diluted common share, for first quarter 2014, where as JPMorgan Chase (JPM) recorded a first quarter 2014 net income of $5.3 billion, a drop from $6.5 billion in the first quarter of 2013.
And now with most of the bank earnings over, earnings for specialty finance and mortgage companies will be hitting the market.
FBR outlined 4 key areas that are impacting mortgage banking revenues:
1. Margins are continuing a downward spiral with no signs of stopping.
Net interest margins stayed flat as lower rates and increased liquidity weighed on margins in the quarter.
“We continue to expect near-term pressure on margins as larger institutions build liquidity to meet regulatory requirements, near-term capital deployment opportunities into higher-yielding liens remain competitive and limited, and amid an expectation for low rates for an extended period of time,” the report stated.
2. Loan growth remains a great divide among banks.
Loan growth for most banks in FBR’s coverage has remained slow, increasing 1.3% quarter-over-quarter. Commercial real estate loans picked up, but consumer loans as a whole remained weak.
According to FBR, “Given 1Q is usually a relatively slow quarter from seasonality, which was especially prevalent this quarter given widespread bad weather across the country, we expect some level of pickup in lending volumes across all asset classes in 2Q and beyond.”
3. Banks cutting expenses are still the main driver behind earnings growth.
While earnings may be increasing, eliminating personnel has significantly boosted it, in addition to reducing branch counts.
“With an expectation that the pace of improvement will moderate for the industry as a whole, we believe banks will be even more limited with the prospects for earnings growth going forward unless there is a significant pickup in economic activity,” FBR said. So far, FBR noted that banks with significant expense cut initiatives have yet to prove that the short-term benefits of expense reductions will not weigh on revenues over time.
4. Mortgage banking continues to be limited due to the lack of pick up in purchase applications.
While it was expected for refinance applications to drastically decline, purchase applications have failed to show the material improvement envisioned at this time a year ago.
“A lack of seller motivation and short housing supplies have left purchase volumes weak, and banks remain reluctant to extend credit outside the existing high-quality credit box,” the report said. As a result, FBR said it will be closely monitoring volumes for the reminder of the spring as the coming months will be critical to as to weather the industry will, miss or beat $1.1 trillion estimate.