Margins shrink more than expected at large banks

Gain on sale margins at four large banks saw a steep drop from the first quarter to the second, surpassing the decline analysts had predicted. That trend is likely to carry over to nonbanks when they report results, a Keefe, Bruyette & Woods report said.

Part of the reason for the average decline of 40%, at least regarding JPMorgan Chase and Wells Fargo, was a shift in production share to lower-margin correspondent purchases from higher revenue retail originations.

However, Wells Fargo and U.S. Bancorp’s results also pointed to lower gains relating from the resecuritization of performing Ginnie Mae early buyouts. Those gains "can be lumpy," KBW analyst Bose George said. (The fourth bank included in this analysis is PNC.)

KBW had expected gain on sale margins to be "roughly flat," although near trough levels, with the first quarter.

Looking back at the first quarter EBO performance at nonbanks Mr. Cooper and PennyMac Financial Services, where the gains were down 95% and 60% respectively from their quarterly averages in 2021, "we had assumed there would not be much more sequential downside from this component for most companies," George said. "We think that the banks' EBO results were potentially weighed down by market-to-market losses on loans bought out from pools, but not yet re-securitized." Servicers cannot resecuritize EBOs, delinquent loans purchased out of Ginnie Mae pools, until they have been back in performing status for six months.

Gains from resecuritized EBOs were also meaningfully reduced because of the rapid rise of interest rates during the second quarter, George added.

"Overall, we think these GOS results point to some modest downside for the nonbank lenders which had largely guided to roughly flat sequential GOS margins," George said.

In the first quarter, both bank and nonbank mortgage lenders apparently managed their margins by cutting origination activity to a greater degree than the expected falloff due to rising interest rates, a May KBW report stated.

Originations at these four banks were down 11% from the first quarter. That was slightly worse than industry forecasts, which expected declines of between 2% and 8%. Compared with the second quarter of 2021, production was down 38%.

At Wells Fargo, $14.5 billion of the $34.1 billion second quarter volume came from correspondent. In the first quarter, it was $13.8 billion of the $37.9 billion total, and in the second quarter of 2021, it was $16.3 billion of the $53.2 billion originated.

JPMorgan Chase originated $21.9 billion in the second quarter, versus $24.7 billion in the first quarter and $42.2 billion for the second quarter of 2021. But almost half of its second quarter originations were from the correspondent channel, compared with 39% in the first quarter and 47% one year prior.

U.S. Bancorp produced $13.9 billion during the second quarter, down from $16.6 billion in the first quarter and $23.7 billion in the second quarter of 2021.

PNC ended the second quarter with volume of $4.8 billion, down from $5.1 billion during the previous quarter and $6.5 billion one year prior.

At the same time, mortgage servicing rights valuations at the four banks increased by 8% from the first quarter. 

"This average mark was about half the magnitude of the first quarter mark, which was roughly what we were expecting, balancing the sharp rise in rates with the fact that most of the outstanding mortgagee population was already out-of-the-money to refinance," George commented. "However, we also think MSR marks could still be reflecting conservative cost to service assumptions ahead of a potential economic slowdown."