How did Wells Fargo and Bank of America’s mortgage businesses perform in the third quarter?

Origination volume differentiates the results

Though its earnings were disappointing overall, residential lending at Wells Fargo rebounded in the third quarter, both in terms of income and origination volume. 

The bank originated $62 billion in home loans during the third quarter, up 5% from $59 billion in the prior quarter. In the third quarter of 2019, Wells Fargo originated $58 billion in mortgages.

In all, Wells Fargo collected $1.6 billion in income from its residential lending operation, up from $317 million in the prior quarter. Even net servicing income checked in at $341 million, up from a loss of $689 million in Q2. 

Though most of its depository competitors posted shrinking margins in the third quarter, Wells Fargo increased its GOS margins by 12 bps to 216 bps.

Like JPMorgan Chase and others, Wells reduced the amount of money it set aside for credit losses to just $769 million, down from the $9.5 squirreled away in the second quarter. Such a move suggests the banking giant is comfortable with its balance sheet and that mortgage defaults would be stable in the upcoming quarter.

Mortgage applications totaling $88 billion in the third quarter were up from $84 billion in the second quarter, the bank reported in its earnings on Wednesday. The activity was driven by low mortgage interest rates and heightened purchase activity, the San Francisco-headquartered bank said.  Wells Fargo’s MSR valuation was flat from the second quarter, with a carrying value of 52 bps. 

Gloomier times could still be ahead. Wells has said it needs to shed $10 billion from its balance sheet, and is likely to cut staff.

Though rival Bank of America posted a $2.1 billion profit in the third quarter in its consumer banking division, up massively from the paltry $71 million profit in the second quarter, mortgage origination volume was down dramatically.

Mortgage originations from the bank totaled $13.4 billion in the third quarter, a drop from $23.1 billion in the second quarter and far below the roughly $20 billion benchmark hit in the fourth quarter of 2019.

BofA had $232 billion in outstanding residential mortgages on its books through Sept. 30, down slightly from $239.5 billion in the second quarter, according to its earnings statement. 

Regarding its use of cash, CFO Paul Donofrio told analysts on Wednesday that BofA company pushed about $100 billion into mortgage-backed securities and treasuries. “You’ll see more of that impact in Q4,” he said.

All told, the Charlotte-based bank put aside an additional $1.4 billion to insure against any losses on its active loans. The bank has now set aside over $8 billion this year to protect itself from defaults.

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