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Lending

Mixed views on mortgage banking

For those banks that reported strong fourth-quarter mortgage banking revenue, trends show loan origination volumes and gain-on-gain margins remaining well above historic profitability levels.

The steady levels were a result of robust refinancing activity driven by low rates, the presence of the Home Affordable Refinancing Program 2.0 (HARP 2.0) and higher home purchase volumes, FBR Capital Markets said.

Given this trend, mortgage banking revenues could remain a boon for the industry in 2013.

"Given what we believe to be a steady demand for refinancing activity and an improving purchase market, we expect mortgage banking to remain a key driver of bank profitability in 2013," FBR Capital analysts noted.

Mortgage pipelines are expected to remain strong and gain-on-gain margins are holding steady in the current ‘yield-seeking environment.’

Thus, banks with large mortgage banking platforms such as Wells Fargo (WFC), US Bancorp (USB) and JPMorgan Chase (JPM) will become the main beneficiaries, FBR noted.

Click on the graph to view gain on sale margins.

JPMorgan Chase's (Chase) mortgage banking business recorded $51.2 billion in originations for the fourth quarter, up 33% from a year earlier and an increase of 8% from the third quarter.

The bank's mortgage banking unit reported net income of $418 million, compared with a net loss of $269 million a year prior.

JPMorgan mortgage production revenue, excluding repurchase losses, was $1.6 billion, up 51% from $543 million the previous year. This was a result of wider margins, driven by favorable market conditions and higher volumes due to historically low interest rates and the Home Affordable Refinance Programs.

U.S. Bancorp achieved record total net revenue and earnings for 2012, largely driven by continued mortgage banking strength and increased card fees.

Strong new lending activity of $71.5 billion during the fourth-quarter was a significant highlight for USB. It included $39.8 billion of new and renewed commercial real estate commitments as well as $29.1 billion of mortgage and other retail loan originations.

Mortgage banking revenue for USB now accounts for 20% of fee revenue, compared with 14% from a year ago.

"Going into the back half of earnings season, we encourage investors to capitalize on what we expect will continue to be strong mortgage banking results while shying away from names with the possibility for material spread compression and/or flat asset balances" FBR Capital said.

While analysts at Compass Point say gains on sale margins will be fairly attractive in the first half of 2013 for mortgage lending units, the research firm also sees refinancing burnout in the near future even as capacity levels build. 

"Wells Fargo, USB, Bank of America, JPMorgan Chase are all hiring mortgage personnel and that additional amount of capacity in the market will allow for a greater amount of originations, which is likely to cause pricing and mortgage rates to contract or the margins around mortgage rates to contract if interest rates stay where they are," analysts at Compass Point told HousingWire.

Gain-on-sales margins are expected to tighten through the second quarter of 2013 for mortgage banking units and post significant contraction during the second half of 2013.

"Our view is based on the expectation for increased competition in the market as Boxer-Menendez effectively allows any mortgage originator to refinance a loan through HARP, even though that loan may be in another banks' servicing portfolio," Compass Point said. "Also, mortgage originators have been hiring more personnel while most forecasts have originations dropping roughly 40% by 2014."

cmlynski@housingwire.com

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