Banks picked up mortgage market share in Q1, early earnings indicate

The quarter-to-quarter increase in mortgage originations at eight banks bested industry-wide expectations, suggesting that the segment is regaining market share, a Keefe, Bruyette & Woods report said.

Combined first quarter volume rose 3% from the fourth quarter and 21% over the first quarter of 2021 at the group of eight banks tracked by KBW: Wells Fargo, JPMorgan Chase, U.S. Bancorp, Bank of America, Truist Bank, First Republic Bank, Citigroup and PNC Financial Services Group. This compares with a 13% quarter-to-quarter decline recently forecasted by both the Mortgage Bankers Association and Freddie Mac. The results even beat Fannie Mae's estimates for a 6% drop in the first quarter.

This implies that some banks such as JPMorgan Chase likely regained market share, and will potentially outpace the industry for the period, KBW analyst Bose George said.

However, "strong volumes were not enough to offset declining gain on sales margins as production income declined for most banks," George wrote in the report, noting that the drop in gain on sale brought margins down to normal levels compared with the outsized gains seen last year.

The gain on sale margin declined quarter-to-quarter for seven out of the eight banks. The outlier was Wells Fargo, and the increase there was attributed to the bank doing early buyouts on loans from Ginnie Mae mortgage-backed securities pools.

The financial results were largely defined by the origination channels that each bank emphasized, a report from Piper Sandler noted.

"The banks with a greater share of originations coming from the retail channel or further emphasizing the retail channel (Wells Fargo, PNC) tended to report stronger results while correspondent-heavy banks (Truist, U.S. Bank, Citizens) saw greater pressure on mortgage banking results from last quarter," said Kevin Barker and R. Scott Siefers, managing directors at Piper Sandler.

Meanwhile, mortgage servicing rights valuations increased on a quarter-to-quarter basis at a higher percentage — 27% for the five banks that provided this information — than the 20% KBW had predicted.

Servicing rights valuations benefited from an 82-basis-point increase in the 10-year Treasury yield and the corresponding 50 bp rise in 30-year mortgage rates since year-end 2020.

"Also, MSR pricing is likely improving as market risks (such as forbearance rates) have declined," George said. "We see the MSR strength as a positive read-through for owners of servicing assets such as Mr. Cooper, New Residential, Two Harbors, PennyMac Financial Services and PennyMac Mortgage Investment Trust."

Piper Sandler noted that Mr. Cooper has one of the largest unhedged MSR portfolios compared with the other publicly-traded non-banks. The first quarter could bring a $125 million increase in Mr. Cooper’s MSR valuation according to the Piper Sandler forecast.

At Wells Fargo, which has the industry's largest MSR portfolio, there was further shrinkage to $801 billion at March 31, from $857 billion at the end of the fourth quarter.

That drop was a result of Wells Fargo reducing the amount of loans it purchases in its correspondent channel.

"In the next year or two, we could see several non-banks such as Rocket Cos., PennyMac Financial Services, New Residential or Mr. Cooper have greater servicing market share than Wells Fargo," Piper Sandler said. "Though we should point out that Wells Fargo has started to originate correspondent nonconforming loans again and could start to see more volume over time."