From the National Mortgage News:
Wells Fargo’s industry-leading mortgage business helped fuel a remarkable four-and-a-half-year stretch during which the bank’s earnings grew each quarter.
But more recently, the home-loan segment has acted as a drag on profitability for Wells. During the second quarter, the firm’s mortgage fee income fell to $1.41 billion, a 17% drop from the same period a year earlier.
One big factor in the decline was a fall in the valuation of the bank’s mortgage servicing rights. The bank’s top executives also said that Wells Fargo is losing mortgage-servicing customers, as other companies refinance them into new loans.
“The servicing book has been getting smaller,” Chief Financial Officer John Shrewsberry said Friday during the firm’s quarterly conference call.
In a follow-up interview, Shrewsberry explained that Wells Fargo has exited some higher-risk parts of its mortgage business, including reverse mortgages. He also noted that the San Francisco bank has chosen to do less business with the Federal Housing Administration, following disagreements over what constitutes a faulty mortgage.
The quarterly decline in mortgage income at Wells disappointed analysts. Kevin Barker of Piper Jaffray wrote in a research note that “mortgage banking dropped lower when we expected a very good quarter.”
Meanwhile, other big banks avoided big declines in mortgage revenue at the start of earnings season.
At U.S. Bancorp, mortgage banking as a percentage of noninterest income rose by 3% from the same period a year before. At PNC Financial Services Group, residential mortgage noninterest income was up by less than 1% compared with the second quarter of 2015.
Wells expects its mortgage-origination business to show stronger results in the third quarter, as lower interest rates allow more homeowners to refinance into new loans.
“We think it’s a great time to be the leader in the mortgage business right now, because homes are selling, and also because people are refinancing,” Shrewsberry told analysts.
When asked whether the recent fall in mortgage rates, following the U.K. vote to exit the European Union, would lead to a refinancing boom, Shrewsberry told National Mortgage News: “I’ll call it a boomlet.”
Shrewsberry also noted that during the second quarter, Wells rolled out a new mortgage product targeted at first-time homebuyers. The loan program, called Your First Mortgage, targets customers the bank would otherwise lose as a result of its decision to scale back its relationship with the FHA.
Like FHA mortgages, the new Wells Fargo product allows for low down payments. Wells plans to sell the loans to Fannie Mae.
“Early reaction to this program has been positive, with over $1 billion of applications in the first 30 days,” Shrewsberry said.
The other piece of good news for Wells Fargo’s mortgage business is that credit quality continues to improve. During the second quarter, the company charged off just $14 million in residential first mortgages, or a measly 0.02% of the loan portfolio.
But one big takeaway from the quarter was that the bank’s position as the nation’s largest mortgage company gives its competitors a big target to shoot at.
“Even as we originate more at this point, there’s more servicing getting called away from us, as others originate rapidly as well,” Shrewsberry told analysts.
For the second quarter, Wells reported net income of $5.6 billion, or $1.01 per share. That was down slightly from $5.7 billion, or $1.03, during the second quarter of 2015.
Revenue rose by 4% to $22.2 billion. But the bank’s return on equity dropped to 11.70%, down from 12.71% in the second quarter of last year. And the firm’s net interest margin fell to 2.86%, down from 2.97% in the same period a year earlier.
“Overall, results were below our expectations and the net interest margin was well short of what we expected,” Brian Kleinhanzl, an analyst at Keefe, Bruyette & Woods, wrote in a research note.
Shares in Wells Fargo were down 2.7% in afternoon trading.