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Wells Fargo mortgage originations tumble amid rising interest rates

Mortgage banking income on the rise, despite declining originations

As interest rates have risen over the last several months, mortgage originations appear to be trending down, especially in the refinance space.

Wells Fargo reported Friday that it originated $46 billion in mortgages in the third quarter, which is down 22% from last year’s total of $59 billion during the same time period.

The overall total isn’t the lowest in recent memory for Wells Fargo though. Back in the first quarter, the bank originated only $43 billion in mortgages. But the trend line for Wells’ mortgage business is heading south, with originations falling from $50 billion in the second quarter to $46 billion in the third quarter.

And there doesn’t appear to be much of a light on the horizon, considering interest rates just hit a seven-year high and don’t seem to slowing down on their way up.

According to Wells Fargo, its first mortgage applications also fell by 22% in the third quarter, compared to last year.

Overall, Wells’ mortgage applications are also trending down. In the third quarter of 2017, Wells received $73 billion in mortgage applications. That figure fell to $63 billion in the fourth quarter, fell again to $58 billion in the first quarter, rose back up to $67 billion in the second quarter, but fell back again to $57 billion in the third quarter.

Wells’ pipeline of unclosed mortgage applications is also on the decline, falling from $29 billion at the end of the third quarter last year to $22 billion at the end of this year’s third quarter.

The bank doesn’t identify specifically what is causing the decline, stating simply that the declines are due to “seasonality.”

Regardless, the bank is definitely seeing far less refinance applications and refi originations than it has in the recent past.

In the first quarter of this year, Wells’ originations were 65% purchase and 35% refi. In the third quarter, the refi share has fallen significantly to just 19% of Wells’ originations, compared to 81% in purchase mortgages.

Overall, Wells Fargo is also making less money in mortgages. Wells’ mortgage banking income fell from $1.05 billion in the third quarter of last year to $846 million in the third quarter of this year, a decline of approximately 20%.

On the positive side of things, Wells’ mortgage banking income was up over the second quarter, when the bank reported $770 million in mortgage income.

Although, the bank’s third quarter net mortgage servicing income was $390 million, down from $406 million in the second quarter. On the other hand, servicing income was up from $309 million during the third quarter of last year.

Wells credits an “improvement in secondary market conditions” for the rise in mortgage income over the second quarter.

One secondary market improvement is the bank’s recent foray back into mortgage securitization. Earlier this week, it was revealed that Wells plans to securitize a series of mortgages for the first time since 2008.

And it appears it won’t the last time.

Wells Fargo said that it is holding $249 million of non-conforming mortgages on its books for now, with the loans designated as held for sale in anticipation of the future issuance of residential mortgage-backed securities.

Overall, Wells Fargo’s third quarter net income and revenue were both up compared with last year. Wells’ net income rose from $4.5 billion last year to $6 billion this year, while its revenue rose from $21.8 billion to $21.9 billion during the same interval.

“In the third quarter, we continued to make progress in our efforts to build a better Wells Fargo with a specific focus on our six goals: risk management, customer service, team member engagement, innovation, corporate citizenship and shareholder value. We are strengthening how we manage risk and have made enhancements to our risk management framework. We also continued to make progress on customer remediation, which is an important step in our efforts to rebuild trust,” Wells Fargo CEO Tim Sloan said in a statement.

“Our focus on shareholder value included progress on our expense savings initiatives, and we returned a record $8.9 billion to shareholders through net common stock repurchases and dividends in the third quarter,” Sloan added. “I’m confident that our efforts to transform Wells Fargo position us for long-term success.”

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