Sterne Agee analyst Henry J. Coffey Jr. noted the sequential decline in mortgage volumes of 28% and a 17 basis point decline in revenue margins for Wells Fargo, and the 27% drop in volume for JPMorgan, and that both banks wrote down the value of mortgage servicing rights held at fair value.
Fitch Ratings, meanwhile, says JPMorgan’s first quarter results were primarily hurt by that weaker mortgage production.
Coffey said that Wells saw a greater decline in correspondent/wholesale volumes (-30% sequentially), while JPM saw a more significant drop in retail (-32%) versus correspondent/wholesale, which was down 24% on a sequential basis.
“Both companies saw lower actual amortization cost relative to levels seen in 4Q13 and write-down in value was tied to changes in payment speed/rate related marks. JPM also wrote down its MSRs to reflect changes in other factors,” Coffey said.
Coffey saw two housing takeaways in the quarterlies:
1. Weak Originations
The weak reported origination results bode poorly for any company counting on contributions from this segment to drive EPS. We are expecting a minimal to breakeven contribution from Nationstar (NSM) originator to earnings in 1Q14 and recently lowered our estimates for Walter Investments (WAC) to incorporate this as well.
2. MSR opportunities
The potential lack of any write-ups in MSR values is on balance a positive. Fair value gains in the carrying value of MSRs are excluded from core EPS and the higher fair value mark then gets caught into amortization cost in subsequent quarters.