With many of the major banks and nonbanks in the mortgage space having reported their second quarter earnings and more coming this week, a note to clients from Keefe, Bruyette & Woods says that mortgage banking earnings generally increased quarter-over-quarter, but this was off of the low base set with the first quarter drop.

Worse, KBW reports, year-over-year earnings were generally down.

“Of the cohort of banks that we track, total originations were up 22% from 1Q, but still down by almost 60% from the same period last year,” KBW says. “Mortgage applications were also up (~26% on average for the companies that reported them).”

Given the ongoing shift in mortgage origination market share from banks to non-banks, KBW expects mortgage origination trends to be somewhat stronger for the nonbank mortgage originators.

KBW also reports that gains-on-sale margins were mostly down as competition remained strong, especially in the correspondent market. A few outliers were able to increase gain-on-sale margins but this was driven by reducing exposure to less profitable segments of the market, or other one-off factors.

KBW says that it believes that gain-on-sale margins to in 2Q14 have been in line with expectations.

MSR fair value marks were generally down as rates fell from the beginning of the quarter. The average mark due to rates was about 5% of the carrying value of the MSR.

“We view the mortgage results for the banks that have already reported 2Q earnings as largely in line with expectations. The nonbanks mortgage companies start reporting earnings this week,” KBW says.

Mortgage volumes quarter to date were up meaningfully versus 1Q14. The increases primarily reflect higher purchase volumes.

Volumes were up by 22% QOQ but down 59% YOY for the banks that we track. Given the shift in market share from banks to non-banks, we believe that industry volume in 2Q was probably up by closer to 25% QOQ.

Industry estimates currently vary with the MBA forecasting an 18% increase but the GSEs expecting larger increases. Fannie Mae is forecasting the strongest increase at 34%.

Mortgage servicing rights valuations were generally down modestly during the quarter driven by falling interest rates. During 2Q, the 10-year US treasury yield was down about 18 bps from the start of the quarter and the Fannie Mae 30-year current coupon was down about 33 bps.

Average 30-year borrower rates were down roughly 25 bps during the quarter, according to the Freddie Mac Primary Mortgage Market Survey. 

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