When Wells Fargo reported the best quarterly earnings in its history last month, printing $3.3 billion for the third quarter of 2010, its mortgage business was one of the highlights. Volumes and margins in mortgage lending are strong. The bank had its second-highest quarterly level of mortgage applications ever at $194 billion, up 35% on the second quarter of 2010. Refinancing largely drove this, as it also did abundant applications at the other banks. A strong pipeline of originations was already bearing fruit in October and looking promising for the rest of this year and the start of the next.
Given the gap between the 5.46% quarterly weighted average note rate on Wells Fargo’s managed servicing portfolio and the prevailing 4.35% rate on new conforming Freddie Mac 30-year fixed-rate mortgages, there is still a huge incentive for all mortgage borrowers that can refinance to do so.
The Mortgage Bankers Association predicts $920 billion of refinancing this year. And while this is below the $1.3 trillion executed in 2009, the MBA sees new purchase originations rising from $480 billion in 2010 by 30% in 2011 and up to $877 billion in 2012, if home prices stabilize.
The large banks mainly originate mortgages for sale to the GSEs, but right across the industry, mortgage lending is good business again. And while low base rates will encourage refinancing only for so long, the industry has been re-pricing and de-risking on new mortgages so that margins for lenders remain wide.
JPMorgan enjoyed very strong mortgage banking revenue of $2.5 billion for the third quarter amid a 27% quarterly rise in originations. Citigroup reported a 66% rise in mortgage originations during the third quarter.
Anecdotal evidence suggests that lenders in the US have not yet returned to the level of intense competition that eats into mortgage margins. While the banking industry has taken some criticism for not passing on the full benefit of lower rates to borrowers, the banks can excuse themselves for not returning to the excesses of the early 2000s.
Investors in bank stock, meanwhile, have been licking their lips at the prospect of taking their bite from these profits, as banks’ return to profitability leads inevitably to calls for higher dividends and share repurchases.
But bank shareholders might have to fast a little longer. Others might yet exert a prior claim on those juicy revenues and earnings.
No sooner have banks returned to profitability, paid back government support and attracted private shareholders to replenish their equity base than MBS bondholders are pressing hard for their cash. Bondholders want banks to repurchase at par securities that have been hit by losses on underlying mortgages wrongly extended to borrowers with too little income and too much debt to have taken them out in the first place.
Banks will probably still be paying for put-backs of agency-backed and private-label MBS long after the present furore over wrongful foreclosures on delinquent mortgages is forgotten.
No one knows what the final bill will be. Independent estimates range from $30 billion to $180 billion to be paid back over the next few years. Resolution of the US mortgage mess is far from over and the dodgy mortgage exposure that flowed out to investors all round the world in the securitization boom is still backing up and the noxious effluent returning to source.
It is because banks look healthy now that these claims for recompense are being pressed. As one lawyer tells Euromoney: you only sue people with deep pockets and you never sue City Hall. The investors that dived back into US bank stocks following the Federal Reserve’s stress tests in spring 2009 might live to curse taking on this litigation risk.
The role of the Federal Reserve in putting back bonds to banks alongside investors that manage public-private investment programme funds designed to take problem assets off banks’ hands is an added insult. In many cases, shareholders bought stock from the government in banks that had not been properly cleansed of problem exposures. It’s a mistake they will be unlikely to repeat if the mortgage finance market so completely unravels that it erodes banks’ capital and requires a second round of government interventions.
see also:
Securitization: Mortgage banks hit by putback time bomb
Securitization under question?
Securitization stuffs the seniors – again
US foreclosures: Between a rock and hard place
