U.S. Mortgage Industry Conditions Improved Slightly In Q2, But Wells Fargo Isn’t Very Optimistic About It

The U.S. mortgage industry witnessed a recovery in activity levels over the second quarter, as an upbeat economic outlook helped total mortgage originations improve from just $346 billion in Q1 2018 to $447 billion in Q2 2018. While the unusually low origination volumes over the previous two quarters can partially be attributed to the seasonal nature of the industry, there has also been a noticeable slowdown in mortgage activity over recent years due to the Fed’s ongoing rate hike process.

Notably, the five largest U.S. commercial banks benefited from improved industry conditions and saw their total mortgage origination volume climb to almost $101 billion for Q2 2018 from less than $87 billion in Q1 2018. However, the figure is well below the $112 billion in mortgages they originated a year ago – a clear indication of continued industry headwinds. And things aren’t expected to improve anytime soon, a view reinforced by the industry-leader Wells Fargo’s recent plans to slash 638 mortgage jobs. The banking giant is reducing the size of its mortgage unit in view of the marked reduction in new mortgage applications over recent quarters, and also because of the low loan default rates (as it now requires a smaller default servicing team).

We capture the impact of changes in mortgage banking performance on the share price of the banks with the largest mortgage operations in the U.S. – Wells Fargo, U.S. Bancorp, JPMorgan Chase and Bank of America – in a series of interactive dashboards.

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

Wells Fargo has remained the largest mortgage originator in the country since 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.

Additionally, there has been a drastic reduction in the combined market share of these five banks over recent years from over 50% in 2011 to just 23% now. While a key reason for this was the sizable reduction in mortgage operations by Bank of America and Citigroup after suffering huge losses in the wake of the recession, there has also been an overall reduction in mortgage market share for U.S. banks as a whole due to stronger growth in credit unions across loan categories.

With the Federal Reserve expected to steadily hike interest rates until at least the end of 2019, we believe that the mortgage industry will likely remain under pressure over the next five or six quarters. Once the interest rate environment normalizes in early 2020, rising mortgage rates will be less of a deterrent for potential homeowners, and origination volumes should return to growth.

Details about how changes to Mortgage Banking performance affect the share price of these banks can be found in our interactive model for Wells Fargo | U.S. Bancorp | JPMorgan Chase | Bank of America

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