Chase, Wells mortgage results benefit from higher margins

While mortgage origination activity came in below expectations at both JPMorgan Chase and Wells Fargo, both benefited from higher per loan gain-on-sale margins, according to Keefe, Bruyette & Woods' initial read on both banks' third quarter results.

Mortgage servicing marks were also higher as duration rose along with interest rates.

On a net/net basis, "mortgage banking results were largely in line with expectations, and we expect mortgage banking earnings to remain under pressure as the industry works on removing capacity and cutting expenses to match very low volume levels," said Bose George, an analyst at KBW, in the report.

Mortgage banking income at Wells Fargo was $212 million in the third quarter, up from $211 million in the second quarter but well below the $1.17 billion recorded one year ago.

Net gain-on-sale contributed $131 million for the most recent period, versus $134 million in the second quarter; however, the margin was actually higher because Wells Fargo originated fewer loans on a quarter-to-quarter basis, $21.5 billion versus $34.1 billion. For the third quarter of 2021, Wells Fargo's net gain-on-sale was $1.06 billion on volume of $51.9 billion.

The other component, net servicing income, was $81 million compared with $77 million in the second quarter and $109 million for last year's third quarter.

At Chase, mortgage fees and related income totaled $313 million in the third quarter, made up of $93 million of production revenue and $220 million in net servicing revenue. This compared with $377 million in the second quarter ($150 million production and $277 million net servicing) and $596 million in the third quarter of 2021, which included an $18 million servicing loss.

Originations fell to $12.1 billion from $21.9 billion in the prior quarter and $41.6 billion in the previous year.

As measured in basis points, gain-on-sale margins increased 8 bps at Chase and 22 bps at Wells from the second quarter, "both better than expected following multiple quarters of downward trending margins," George said. "We had expected roughly flat gain-on-sale margins."

The change at Chase was attributed to a shift in share of retail production versus correspondent, to 64%/36% from almost 50%/50%.

The 45% drop in total volume at Chase and 37% reduction at Wells compared with the second quarter were below the Mortgage Bankers Association's forecast of production dropping roughly 27%, George noted.

Meanwhile, Chase's mortgage servicing rights valuation increased by 7% compared with the second quarter while Wells Fargo's rose 9%. "Given the move up in rates during the quarter, positive MSR marks were expected, but still came in slightly higher than our expectations for the industry," George said.