The marked decline in the total volume of mortgages originated by the country's biggest banks over the last two quarters is no secret, with the industry reversing its trend of a steady quarter-on-quarter growth in new mortgages for well over two years. But this visible trend in mortgage originations is actually the amalgam of two underlying trends of an opposing nature. The dominant factor has been the sharp decline in the number of mortgage refinances in the recent past, which overshadowed the improvement in the number of fresh mortgage applications over the same period. This difference is easy to overlook because banks club both these figures together to arrive at a single figure for the mortgage origination volume over a quarter.
While one could safely say that the record mortgage origination figures seen in Q3 2012 are unlikely to be seen in the near future, we believe that the mortgage business will begin to show an increase in originations over the coming quarters. In this article we detail the reasons why we believe so, and also discuss the changes that the banking giants with a substantial stake in the industry – namely Wells Fargo (NYSE:WFC), JPMorgan Chase (NYSE:JPM), Bank of America (NYSE:BAC) and U.S. Bancorp (NYSE:USB) – have implemented in the recent past to ensure profitability.
The Refinancing Wave Is Over For Good…
Over the 2010-2012 period, a large part of mortgage originations came from home owners opting to refinance their existing mortgages to benefit from record-low mortgage rates and also from government-led initiatives. This allowed the originations figure to scale new heights, before it began declining. The refinancing channel nearly dried up over subsequent months, with very few mortgages eligible for refinancing still remaining. Also, mortgage rates began rising towards the end of Q2 2013 because of which refinancing the mortgages no longer remained a profitable option for homeowners.
The banks have acknowledged this situation in more than one way – with the most clear message in this regard being the series of job cuts announced by the banking giants in their mortgage divisions, in a bid to keep operating margins stable even as the revenue diminishes. JPMorgan is looking to trim the most mortgage jobs, with the diversified banking group likely to do away with 15,000 of these jobs by the end of next year. While Wells Fargo is slashing 2,300 jobs in its mortgage operations across the country (see As Refi Boom Wanes Wells Fargo Cuts Headcount At Mortgage Lending Unit), Bank of America and Citigroup propose to cut more than 2,000 jobs each over coming months.
… But A Number Of Factors Point Towards More Fresh Mortgages Over Coming Months
Quite notably, the banks have reported an increase in the number of fresh mortgage applications over the last two quarters. While this looks counter-intuitive, as rising mortgage rates should act as a deterrent to people looking to buy houses by applying for a mortgage, the situation can be explained by the fact that there is a growing optimism about the country's economy in general and about the mortgage industry in particular.
Improving employment and consumer demand figures indicate that the U.S. economy is on its path to recovery. And home prices have also been on the rise, which is a plus for any lender (see Here Is How Banks Benefit From The Ongoing Rally In Home Prices). The recent decision by U.S. agencies to preserve a mortgage lender's option to hand out loans with zero down-payment should also go a long way in fence-sitters consider the option of taking a mortgage more seriously.
All these factors put together, we see considerable growth potential in the mortgage industry – something we capture in our analysis for Wells Fargo as shown in the chart below.
Disclosure: No positions