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What We're Reading: The Good Friday edition
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Investments

Mortgage refinance boom boosts revenue for big banks

The mortgage refinance boom contributed to stronger revenue for many big bank companies in third quarter of 2012, reflecting the effects of the Federal Reserve’s quantitative easing measures, bringing long-term rates down to extremely low levels, Fitch Ratings said in a third-quarter banking report.

Big bank players researched in the quarterly comments included Bank of America (BAC), Citigroup (C), Goldman Sachs (GS), JPMorgan Chase .

"Although refinance activity will continue into 2013, Fitch Ratings expects that refinance activity will level off and thus current levels are not considered sustainable," the report stated.

Bank of America posted modest improvement in core earnings as a result of an uptick in investment banking as well as a boost in mortgage banking income given strong originations amid the rally in mortgage rates during the quarter.

But the bank also experienced an increase in mortgage representation and warranty claims, primarily emanating from government-sponsored enterprises, particularly Fannie Mae, as well as private-label securitizations.

As a result, the company booked an additional $307 million rep-and-warrant provision, bringing the reserve total to $16.3 billion.

“Fitch expects these types of developments to continue to drag on net earnings and also absorb management attention for some time to come,” the report said.

Citi continued to make strides in bringing down noncore assets.

The company currently has $171 billion of noncore assets, predominately residential mortgages, at Citi Holdings, which is down from $191 billion in the previous quarter.

However, the pace of reduction in noncore assets is expected to slow, Fitch said.

Investment and lending revenue was positively affected by mark-to-market adjustments in both equity and credit-related positions for Goldman Sachs.

The investment banking and the investment management segments posted moderate declines, but remained steady contributors to the quarter.

Under Basel III published guidance, which has not been finalized, the company’s Tier I common ratio stood at an estimated 8.5%, up from 8% from the end of the second quarter.

Deposits continued to grow for JPMorgan Chase and totaled $394 billion for the quarter.

The mortgage sector was strong with record mortgage production net income totaling $562 million, reflecting sturdy loan origination volumes and wider margins offset by higher servicing costs.

Mortgage application volume was also up significantly, suggesting the volume trends will continue into the next quarter, Fitch said.

JPMorgan is also continuing to make progress on meeting Basel III capital requirements. The company is expected to build capital in anticipation of the additional requirements as a "designated globally systemically important financial institution."

Wells Fargo saw its mortgage repurchase expenses decline.

The company provided another $462 million related to mortgage loan repurchases losses, down from $699 million from the previous quarter.

"Fitch continues to expect that provisions for mortgage loan repurchase losses will remain a modest drag on earnings performance over coming periods," the report stated.

cmlynski@housingwire.com

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