UPDATE: J.P. Morgan, Wells Fargo 1Q Results Suggest Mortgages Are On Mend
April 13 2012 - 4:47PM
Dow Jones News
After years of dire straits in the aftermath of the U.S.
real-estate collapse, the mortgage business is showing signs of
life again.
In the kick-off to a week of first-quarter bank earnings
reports, results from two industry heavyweights--J.P. Morgan Chase
& Co. (JPM) and Wells Fargo & Co. (WFC)--showed strong
gains in their mortgage lines.
Wells Fargo reported a 42% increase in income from its
mortgage-banking business, to $2.87 billion from $2.02 billion in
the year-ago quarter. At J.P. Morgan, mortgage profits swung to a
$461 million gain in the quarter, from a $1.1 billion loss last
year. The bank's mortgage revenue rose 80%, to $1.6 billion.
Chief executives of both banks said Friday that they believed
the mortgage market was finally turning around.
"On the housing side, we're seeing improvement, and we've been
seeing that for some time," Wells CEO John Stumpf said during a
conference call with analysts. "When you have the dynamics of
higher rental rates and lower home values at attractive financing
rates, there's a point in time where the market is going to clear.
I think we're getting very close to that tipping point."
Said J.P. Morgan CEO Jamie Dimon: "We think housing is getting
very close to the bottom."
J.P. Morgan shares closed $1.63 lower, or 3.6%, at $43.21. Wells
Fargo shares closed down $1.18, or 3.5%, at $32.84. Year-to-date,
J.P. Morgan's stock is up 30% and Wells Fargo shares are up
19.2%.
"Mortgage credit trends improved slightly as delinquency and net
charge-off trends modestly improved from last quarter," Keefe,
Bruyette & Woods said in a note on J.P. Morgan's results,
though it cautioned that charge-offs remain high.
The two banks' results track with industry data. Evercore
Partners noted March foreclosure filings were down 3.9% from the
prior month and 17.1% year-over-year, citing RealtyTrac, and that
the four-week average of an index tracking purchase applications
increased for the fifth consecutive time, by 2.2%. "Mortgage
banking (is) poised for a blowout quarter," Jeffries said in a
note.
Other bank figures also suggested mortgages are on the mend.
J.P. Morgan's mortgage-application volume rose 33%, and
originations rose 6% to $38.4 billion. The bank's net charge-offs
declined across all prime, sub-prime and home-equity home-lending
lines, and its allowance for loan losses declined by $1
billion.
At Wells Fargo, originations rose to $129 billion, from $120
billion in the fourth quarter of last year. Meanwhile, credit
quality improved, with net charge-offs for consumer real-estate
loans declining to $791 million, or 1.39% of average loans on an
annualized basis, from $844 million, or 1.46% in the prior
quarter.
Some weaknesses persist. Based on regulatory guidance, J.P.
Morgan moved $1.6 billion in second mortgages to its non-performing
loan book. Though nearly all the loans are current, they are loans
on homes where the first mortgage is delinquent. "We're reserving
those because we know they're going to go bad," Dimon said.
Wells Fargo also reclassified $1.7 billion of performing junior
liens to non-performing status.
It also set aside $2.5 billion in litigation reserves for
anticipated costs related to legal settlements over past mortgage
practices, far more than previously.
Executives cautioned that recent high margins on mortgages are
likely to decline in the future. In addition, at least some of the
increased volume may be due to re-financings, rather than new
business.
At Wells Fargo, the bank increased its set-aside of funds for
losses on mortgages it must repurchase to $430 million, from $404
million in the previous quarter.
-By Christian Berthelsen, Dow Jones Newswires; 212-416-2381;
christian.berthelsen@dowjones.com
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