Understanding Trends In Mortgage Originations By U.S. Banks

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Slowing mortgage revenues have dragged down top-line figures for the country’s biggest banks for a while now, with origination volumes declining quarter-on-quarter since the mortgage refinancing wave died down in late 2012. The impact of this can be seen more clearly among banks which bulked up their mortgage banking business after the economic downturn of 2008 – Wells Fargo (NYSE:WFC) and U.S. Bancorp (NYSE:USB) – compared to those which were forced to slash their mortgage operations in the wake of the recession such as Bank of America (NYSE:BAC) and Citigroup (NYSE:C). Moreover, things are also not expected to improve much in the near future.

This is because the uncertainty over interest rates due to the Fed’s tapering plan is likely to keep the demand for fresh mortgages depressed. Meanwhile, the banks are also done sifting through their mortgage application pipeline – leaving few avenues for growth in origination volumes for the time being. In this article, we highlight the changes in mortgage origination volumes for each of the country’s five largest commercial banks over the last two years and also what to expect from each of them over the coming years.

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The mortgage industry has been extremely volatile since early 2005 – with a boom over 2005-2007 being followed by the crash that contributed to the economic downturn. As the economy recovered from recession, record-low interest rates coupled with several government-led incentives gave a boost to the industry in 2011-2012 when homeowners rushed to get their mortgages refinanced to benefit from the improved interest environment and lending terms. Refinancing activity dried up soon, though, and without much improvement in the demand for fresh mortgages, Q1 2014 saw the lowest mortgage origination volumes since Q3 1997. Historical mortgage origination data compiled by the Mortgage Bankers Association (MBA) shows that U.S. mortgage origination volumes jumped from a low of $246 billion in Q1 2011 to $597 billion in Q4 2012 before diving to $226 billion in Q1 2014. ((Quarterly Origination Estimates, Mortgage Bankers Association))

The table below summarizes the volume of mortgages each of the country’s five biggest banks originated each quarter over the last nine quarters. The data has been compiled using figures reported by individual banks as a part of their quarterly announcements. It should be noted that all the banks include refinanced mortgages in addition to fresh mortgages as a part of their total origination figure for a period.

(in $ billions) Q1’12 Q2’12 Q3’12 Q4’12 Q1’13 Q2’13 Q3’13 Q4’13 Q1’14
Wells Fargo 129.0 131.0 139.0 125.0 109.0 112.0 80.0 50.0 36.0
JPMorgan 38.4 43.9 47.3 51.2 52.7 49.0 40.5 23.3 17.0
Bank of America 16.0 18.9 21.2 22.5 25.0 26.8 24.4 13.5 10.8
U.S. Bancorp 19.2 21.7 21.5 22.1 21.7 17.8 15.2 8.6 6.2
Citigroup 14.3 12.9 14.5 16.8 18.0 17.2 14.5 8.3 5.2
Top 5 Total 216.9 228.4 243.6 237.6 226.4 222.8 174.6 103.7 75.3
Total Market 436.0 431.0 550.0 597.0 524.0 537.0 401.0 293.0 226.0

The data shows that Wells Fargo is the undisputed leader when it comes to mortgage originations, with the bank having originated more home loans than its four closest competitors combined in several quarters. In fact, comparing these figures with the total market size data compiled by the Mortgage Bankers Association shows that in early 2012 Wells Fargo was responsible for originating one in every three mortgages in the U.S. Its market share has shrunk over the years, though, to settle at just below 16% for Q1 2014. With the bank recently announcing its decision to do away with interest-only home-equity lines of credit almost completely – something competitors will continue to offer – its market share figure is expected to remain under pressure in the future. [1]

Notably, the market share of these five banks put together has fallen considerably, from 53% in Q2 2012 to 33% in Q1 2014. This indicates that they gained in the industry primarily because people with existing mortgages refinanced their loans under the government’s HAMP initiative with large banks instead of smaller lenders or credit unions. After all, refinances were responsible for nearly three-fourths of all mortgages originated between Q4 2011 and Q1 2013.

With a mortgage banking division that remained largely unchanged even after the recession, JPMorgan comes in at a rather distant second. The bank has a strong presence in the industry, though, and has leveraged its country-wide branch network to maintain its market share over the years and we expect it to continue to do so in the future. As for the country’s largest regional bank, U.S. Bancorp, things have slowed down faster than its peers because of its focus on specific geographies. This has allowed Bank of America to regain the third position in this list over recent quarters. While Bank of America is now focused on growing its mortgage business, it had to slash it considerably after the downturn and gave away its position as the country’s top mortgage originator in the process. Citigroup’s mortgage unit also met with a similar fate, although the globally diversified banking group recently expressed its intent to boost mortgage lending as it is currently well below its “natural market share”. [2]

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Notes:
  1. Wells Fargo Rethinks ‘Interest-Only’ Home-Equity Loans, The Wall Street Journal, Jun 2 2014 []
  2. Citigroup Plans to Expand Mortgage Lending, Fraser Says, Bloomberg, May 20 2014 []