Improvement In Mortgage Industry Conditions Helped Largest U.S. Banks Reverse Declining Market Shares

The five largest U.S. banks originated residential mortgages worth more than $118 billion in Q3 2017 – a sequential improvement from the figure of $110 billion in the previous quarter, but well below the $139 billion in mortgages originated a year ago. The sharp year-on-year decline is primarily because of the reduction in overall activity levels across the industry from the Fed’s decision to steadily hike interest rates – something that has elevated mortgage rates this year.

That said, the market share of the five largest U.S. banks improved to over 25% in Q3 2017 after declining for two consecutive quarters. Wells Fargo remained at the top of the list with a market share of 12.5% for the period. We maintain a price estimate of $56 for Wells Fargo’s shares, which is slightly ahead of the current market price.

*Total U.S. Originations includes fresh mortgages as well as mortgage refinances as compiled by the Mortgage Bankers Association

The mortgage industry in the U.S. witnessed a sharp reduction in origination volumes since Q4 2016, as a series of interest rate hikes by the Fed weighed on mortgage refinancing activity even as an increase in mortgage rates hurt the number of fresh mortgage applications. This led to total mortgage originations falling from $561 billion in Q3 2016 to just $361 billion in Q1 2017. But a sharp increase in fresh mortgages over the last two quarters helped the figure reach $471 billion by Q3 2017.

Wells Fargo has remained the largest mortgage originator in the country from well before the economic downturn. While the bank was always focused on the mortgage business, it tightened its grip in the industry after the recession thanks to its acquisition of Wachovia – originating one in every four mortgages in the country in early 2010. Although weak conditions in the mortgage space dragged down Wells Fargo’s market share to a low of 11% in Q4 2015, the bank’s market share has largely remained around 12.5% over recent quarters.

You can see how changes to Wells Fargo’s mortgage origination volumes affect our price estimate for the bank by modifying the chart below.

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