Wells Fargo, JPMorgan, Citi, PNC Bank report strong mortgage volumes

January 15, 2021 6:19 PM

Mortgage originations do appear to be falling slightly on average as the refinance boom has gotten long in the tooth, but bank earnings reported Friday suggested that, overall, they’ve been surprisingly resilient, according to a Keefe, Bruyette & Woods report.

“Mortgage banking results came in generally better than expected at several large banks,” Bose George, Thomas McJoynt-Griffith and Michael Smith, analysts at Keefe, Bruyette & Woods, said in the report.

Earlier Fannie Mae and the Mortgage Bankers Association forecasts predicted that fourth-quarter origination volumes would fall 7% on a consecutive-quarter basis, but early earnings numbers from Wells Fargo, JPMorgan Chase, Citi and PNC Bank on average show they were down just 3% when purchased loans were excluded, according to KBW.

In addition, analysts were surprised to see marks on mortgage servicing rights rose on average by 9% given that rates remained at or near record lows during the quarter, which was expected to maintain some pressure on valuations.

“MSR pricing could be improving as market risks (for example, in terms of forbearances) have declined,” the KBW analysts said.

Gain-on-sale margins for originations on average were in line with analysts’ expectations that they will continue to undergo slight compression.

However, within these metrics, there was naturally some variation by company. What follows are some details related to how each fared in 4Q20 that illustrate broader challenges and opportunities that are emerging in the mortgage business.

Wells Fargo managed to increase its GOS margin

Gain-on-sale margins rarely remain strong throughout a long-running refi boom, but Wells’ went up by 20 basis points on a consecutive-quarter basis.

It was likely able to do this because it increased the retail component of its loan mix to 60% from 53%, according to KBW. That can reduce costs that are sometimes higher in the correspondent channel, but it also may have contributed to a relatively steep quarter-to-quarter drop in volume.

At $53.9 billion, Wells’ originations were down from $61.6 billion in the third quarter of last year, and even from $59.8 billion in the fourth quarter of 2019.

JPMorgan Chase’s origination volume was unusually strong

The $32.5 billion in originations JPMorgan Chase produced during the fourth quarter of 2020 came in a little below the $33.3 billion it produced last year, but represented a 12% increase on a consecutive-quarter basis from $29 billion in 3Q20.

That percentage increase is substantial considering that both Fannie Mae and the Mortgage Bankers Association expected to see a 7% decrease, and the upper bound of the most optimistic industry forecast (Freddie Mac’s) was a 6% gain.

However, JPM Chase may have had to rely more on a higher-cost correspondent channel to do it. Its retail share dropped to 62% from 71% between the third and fourth quarter and its GOS margin declined by 17 basis points.

Citi mortgage originations remained remarkably consistent

In the mortgage business, which is typically subject to quarter-to-quarter volatility, it can be an accomplishment to report steady-as-she-goes results like Citi did in originations.

Citi’s fourth-quarter originations of residential first-lien mortgages of $6.6 billion matched those seen in the previous fiscal period, and were up just slightly compared to the $6 billion in loans it produced in the fourth quarter of 2019.

The company did largely withdraw from servicing. That’s generally a move that can help stabilize a mortgage operation’s earnings overall since valuations can be subject to volatile quarter-to-quarter swings. But since servicing values generally rose in 4Q20, it likely missed out on some gains because of this decision.

PNC shows a smaller player can still be competitive

Although the uptick in its gain on sale was not as impressive as Wells’ increase, PNC’s smaller uptick was a little surprising given how long the refi boom’s gone on and that margins overall are expected to be under pressure.

PNC saw a 13-basis-point consecutive-quarter increase in the fourth quarter, even though it doesn’t enjoy the same economies of scale in its operations as a bigger company like Wells.

Like Wells, however, it did experience a consecutive-quarter decline in originations. It generated $3.7 billion in volume, down from $4 billion in 3Q20. However, PNC’s originations remain higher than they were in the fourth quarter of 2019, when they totaled just $3.5 billion.