What Chase, Wells 2Q earnings say about the mortgage market

While bleak in some regards, Wells Fargo and JPMorgan Chase's second-quarter earnings do contain some positive indicators for the mortgage lending industry. The two banks' strong year-over-year growth in gain-on-sale margins for mortgage loans are likely indicative of second-quarter results for other lenders, said analysts at Keefe, Bruyette & Woods.

"Our expectation remains for industry-wide GOS margins to be up strongly given the widening of primary/secondary spreads during the quarter, the result of robust mortgage demand outweighing available supply," KBW analyst Bose George wrote in a report.

Production revenue trends were very strong for both banks, which supports KBW's expectations for strong mortgage banking profitability across the industry. However, the fair value mark-to-market hits for mortgage servicing rights were a bit more severe than expected, which is a negative for mortgage servicers, George added.

JPMorgan Chase's gain-on-sale margin rose 193 basis points from the first quarter to 301 bps, while at Wells Fargo, it rose 96 bps to 204 bps. Unlike Chase and most other lenders, Wells books gain-on-sale income at the time the loan is sold rather than when the rate is locked.

Chase reported $917 million in mortgage fees and related income for the quarter, made up of $742 million of net production revenue and $175 million of net servicing income. In the first quarter, Chase made $320 million in mortgage income ($319 million from originations) while in the second quarter last year it made $279 million, as $353 million from originations was offset by a $74 million loss on servicing.

At Wells Fargo, mortgage banking income was $317 million, down from $379 million in the first quarter, because of the lower MSR valuation and lower net servicing fees due to payment deferrals and fee waivers instituted in response to the COVID-19 pandemic. While Wells earned $1.0 billion on originations in the second quarter, it lost $689 million on servicing.

In the second quarter of 2019, Wells Fargo reported mortgage banking income of $758 million.

Recently Wells Fargo repurchased $14 billion of mortgages included in Ginnie Mae securities that were delinquent due to the coronavirus-related forbearances.

Both banks underperformed though, when it came to growth in origination volume, George said. The Mortgage Bankers Association had forecasted 54% quarter-to-quarter growth in origination volume.

Chase originated $24.2 billion in the second quarter, down from $28.1 billion in the first quarter and $24.5 billion in second quarter of 2019.

The decline was the result of a shift in production activity to the retail channel, a business decision likely driven by the higher margin Chase earns on those loans than on mortgages it purchases through the correspondent business, George noted.

It had $18 billion in retail originations in the second quarter, nearly 75% of its total volume. In the first quarter, retail was about half, $14.1 billion; that share was similar to the first quarter of 2019, when retail was $12.5 billion of total production.

Wells Fargo originated $59 billion in the first quarter, of which $43 billion was for the secondary market and $16 billion for its own portfolio. The company recently announced an expansion in its portfolio loan underwriting criteria.

In the first quarter, Wells originated $48 billion, of which $33 billion was to be sold in the secondary market and in the second quarter last year it originated $53 billion, with $33 billion for the secondary market.

Mortgage originations at Citigroup grew to $6.4 billion in the second quarter, up from $4.1 billion in the first quarter and $3.9 billion in the second quarter of 2019.

Gain-on-sale and servicing income for the quarter was $81.8 million, compared with $86.3 million in the first quarter and $31.3 million one year ago.