Which Way Is The Mortgage Market Headed In 2014?

March 5th, 2014 by Trefis Team
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The mortgage market has been extremely volatile since early 2005 – with a boom from 2005-2007, 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, as homeowners rushed to get their mortgage loans refinanced to benefit from the improved interest environment and lending terms. 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. ((Quarterly Origination Estimates, Mortgage Bankers Association))

But the trend reversed in 2013, with the refinancing wave dying down and the increase in fresh mortgages unable to counter the decline in refinancing. The MBA reported just over $400 billion in mortgage originations for Q3 2013, and although the figures for the last quarter of 2013 have yet to be released, it estimates a figure below $300 billion. [1]

So what can investors expect from the mortgage industry in 2014? And how will mortgage origination activity impact revenues at the country’s five largest commercial banks – JPMorgan Chase (NYSE:JPM), Bank of America (NYSE:BAC), Citigroup (NYSE:C), Wells Fargo (NYSE:WFC) and U.S. Bancorp (NYSE:USB)? We attempt to answer these questions below.

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Mortgage origination is the first and most basic activity in the mortgage banking business; in addition to new mortgages, banks also include refinanced mortgage loans as a part of their total origination figure for the period. Since the economic downturn, the largest U.S. banks have shaped their new business models around the condition of their mortgage banking businesses. While Wells Fargo and U.S. Bancorp lean heavily on the mortgage industry, Bank of America and Citigroup have reduced their mortgage businesses to shadows of their former selves. The only banking giant that has largely maintained its business at a similar level through the years is JPMorgan.

The table below summarizes the volume of mortgages each of the country’s five biggest banks originated each quarter over the last ten quarters. The data has been compiled using figures reported by individual banks as a part of their quarterly announcements.

(in $ millions) Q3’11 Q4’11 Q1’12 Q2’12 Q3’12 Q4’12 Q1’13 Q2’13 Q3’13 Q4’13
Wells Fargo 89,000 120,000 129,000 131,000 139,000 125,000 109,000 112,000 80,000 50,000
JPMorgan 36,800 38,600 38,400 43,900 47,300 51,200 52,700 49,000 40,500 23,300
Bank of America 33,885 22,373 15,998 18,935 21,248 22,478 25,036 26,772 24,429 13,539
U.S. Bancorp 11,509 17,415 19,168 21,667 21,529 22,111 21,698 17,796 15,192 8,563
Citigroup 17,000 21,100 14,300 12,900 14,500 16,800 18,000 17,200 14,500 8,300

The data clearly shows that Wells Fargo is the undisputed leader when it comes to mortgage originations, with the country’s fourth largest bank in terms of assets 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.

As we pointed out earlier, a bulk of the originations witnessed over 2011-2012 (averaging 72% of all mortgages between Q4 2011 and Q1 2013) were a consequence of low interest rates giving homeowners incentive to refinance their existing mortgages. This is why the figures for all banks tanked by the end of 2013. To put things in perspective, mortgage originations by these five banks fell from $244 billion in Q3 2012 to $104 billion in Q4 2013 – a trend that closely mirrors the market as we detailed above.

While mortgage refinancings will continue to shrink in size over coming quarters, fresh mortgages will grow over the period. The MBA estimates the net effect of these two factors on total mortgage origination will be negative in 2014, with total mortgages origination volume declining 32% from the figure in 2013. [2] The trend will likely stabilize in 2015 and finally begin moving upward over subsequent years.

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Notes:
  1. MBA Sees 2014 Originations Falling 32 Percent from 2013, MBA Press Releases, Oct 29 2013 [↩]
  2. ref:2 [↩]