GSE repurchase requests drag third-quarter mortgage growth

Mortgage banking results continue to stay strong for the third quarter because of of gain-on-sales margins and an increased volume of origination. However, representations and warranty claims also remain elevated, primarily as a result of new repurchase requests made by the government-sponsored enterprises.

Wells Fargo (WFC), JPMorgan Chase (JPM), and Bank of America (BAC) all reported strong third-quarter earnings. Wells profit grew as the loans in its portfolio rose another $11.9 billion, for example, driven by new mortgage businesses. JPMorgan also blew past analysts expectations in the third quarter due to strong mortgage growth.

Various mortgage originators also report strong third-quarter mortgage results, according to Keefe, Bruyette & Woods, a continuation from the second quarter. Further, KBW anticipates mortgage volumes to remain solid because of low interest rates and production through HARP.

Barclays Capital (BCS) securitized products researchers point out continued representation and warranty payouts are dragging mortgage books at the big lenders.

The analysts continue to view BofA as an outlier when it comes to rep and warranty claims, which is a direct result of the over repurchase requests disagreement with Fannie Mae. The bank and the government-sponsored enterprise disagree over $7.9 billion in mortgages. Fannie claims BofA should buy back the mortgages because of faulty origination practices, up from $3.7 billion at the end of last year.

Furthermore BofA also announced in May it will repurchase roughly $330 million in mortgages it sold to Freddie Mac due to “contractual matters,” according to a filing with the Securities and Exchange Commission.

The overhanging concern is whether or not these reps and warrants issues will generate trepidation around GSE buyouts on newly originated loans. It may, but not to a high degree, sources say.

Industry capacity constraints and strong investor demand for HARP mortgages continue to keep gain-on-sale margins high, according to KBW. The investment bank feels, reps and warrants aside, mortgages will continue to remain a strong source of earnings for lenders.

Primary and secondary mortgage rates remain wide through the 3Q and widened after the QE3 announcement for continued support of the mortgage bond market. As a result, GOS margins in 4Q12 are expected to remain positive.

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