Big banks see gains in mortgage originations

The quarter-to-quarter increase in mortgage originations at eight banks bested expectations and suggests that banks are regaining market share in mortgage lending, a Keefe, Bruyette & Woods report said.

Combined first-quarter volume rose 3% from the fourth quarter and 21% over the first quarter of 2021 at the group of eight banks tracked by KBW: Wells Fargo, JPMorgan Chase, U.S. Bancorp, Bank of America, Truist Financial, First Republic, Citigroup and PNC Financial Services Group.

Bank of America, Citi and JPMorgan Chase were among the large banks that reported gains in mortgage originations in the first quarter.

This implies that some banks such as likely regained market share from nonbank lenders and will potentially outpace the industry for the period, KBW analyst Bose George said. The Mortgage Bankers Association and Freddie Mac had predicted that overall originations would decline by 13% quarter to quarter.

However, “strong volumes were not enough to offset declining gain on sales margins as production income declined for most banks,” George wrote in the report. The decline, he said, shows that gains on sales normalized in the first quarter after following a year of strong gains.

The gain on sale margin declined quarter-to-quarter for seven of the eight banks. The outlier was Wells Fargo, and the increase there was attributed to the bank’s early buyouts of loans from Ginnie Mae mortgage-backed securities pools.

The financial results were largely defined by the origination channels that each bank emphasized, a report from Piper Sandler noted.

“The banks with a greater share of originations coming from the retail channel or further emphasizing the retail channel (Wells Fargo, PNC) tended to report stronger results while correspondent-heavy banks (Truist, U.S. Bank, Citizens Financial Group) saw greater pressure on mortgage banking results from last quarter,” said Kevin Barker and R. Scott Siefers, managing directors at Piper Sandler.

Meanwhile, mortgage servicing rights valuations increased on a quarter-to-quarter basis at a higher percentage — 27% for the five banks that provided this information — than the 20% KBW had predicted.

Servicing rights valuations benefited from an 82-basis-point increase in the 10-year Treasury yield and the corresponding 50 basis-point rise in 30-year mortgage rates since the end of 2020.

“Also, MSR pricing is likely improving as market risks (such as forbearance rates) have declined,” George said. “We see the MSR strength as a positive read-through for owners of servicing assets such as Mr. Cooper, New Residential, Two Harbors, PennyMac Financial Services and PennyMac Mortgage Investment Trust.”

Piper Sandler noted that Mr. Cooper has one of the largest unhedged mortgages servings rights portfolios among publicly traded nonbanks. The first quarter could bring a $125 million increase in Mr. Cooper’s MSR valuation, according to the Piper Sandler forecast.

At Wells Fargo, which has the industry’s largest MSR portfolio, there was further shrinkage to $801 billion at March 31, from $857 billion at the end of the fourth quarter.

That drop was a result of Wells Fargo’s reducing the amount of loans it purchases in its correspondent channel.

“In the next year or two, we could see several nonbanks such as Rocket Cos., PennyMac Financial Services, New Residential or Mr. Cooper have greater servicing market share than Wells Fargo,” Piper Sandler said. “Though we should point out that Wells Fargo has started to originate correspondent nonconforming loans again and could start to see more volume over time.”

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