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DealBook: Wells Fargo Profit Jumps 24% in Quarter, Driven by Mortgage Gains

January 11, 2013 by Leave a Comment

Wells Fargo

8:46 a.m. | Updated

Wells Fargo on Friday reported $5.1 billion in profit for the fourth quarter, a 24 percent increase, driven by the bank’s lucrative mortgage business.

Seizing on low-interest rates that have spurred a flurry of refinancing activity, the San Francisco-based bank again notched record profits. For the last 12 quarters, profits at the bank have increased.

In this latest quarter, Wells Fargo reported earnings of 91 cents a share, which exceeded analysts’ expectations. Ahead of the report, analysts polled by Thomson Reuters estimated that the bank would report earnings of 89 a share.

Wells Fargo, unlike many of its rivals, has been able to steadily increase its revenue. Launching bank earnings season, Wells Fargo reported $21.95 billion in revenue in the fourth quarter, up 7 percent from a year earlier.

Much of the revenue gains stemmed from the bank’s consumer lending business, as borrowers jumped on record low interest rates to refinance their mortgages. Wells Fargo, which dominates the market as the nation’s largest mortgage lender, notched $125 billion in mortgage originations, up from $120 billion in the fourth quarter of 2011. Refinancing applications accounted for nearly 75 percent of that total.

The big profits in the group came from the extra money that Wells Fargo makes bundling the mortgages into bonds and selling them to the government. In the fourth quarter, the bank reported $2.8 billion of so-called net gains on its mortgages activities, up 51 percent from the previous year.

Under the tenure of its chief executive, John Stumpf, Wells Fargo has aggressively expanded into the mortgage market, a strategy that might help the bank surpass its rivals in profits, notably JPMorgan Chase.

Wells Fargo’s net interest margin, a closely watched profits metric that measures the difference between the interest the bank collects and the interest it pays on its own borrowings, was down slightly to 3.56 percent, from 3.89 percent a year earlier.

Profits in the community banking division, which spans Wells Fargo’s retail branches and mortgage business, increased 14 percent to $2.9 billion.

The bank successfully courted more cash from depositors, adding $72 billion in total core checking and savings deposits than a year earlier.

“The company’s underlying results were driven by solid loan growth, improved credit quality, and continued success in improving efficiency,” Wells Fargo’s chief financial officer, Tim Sloan, said in a statement.

The bank has benefited from sweeping federal stimulus initiatives that have buoyed the mortgage business. The Treasury Department has helped prompt Americans to refinance their mortgages.

Wells Fargo is the reigning titan in the mortgage industry, generating roughly a third of all the mortgages across America. Mortgage originations continued to climb, up 4 percent to $125 billion.

Adding to its mortgage-related profits, Wells Fargo reported a $926 million profit from its servicing business, in which the bank collects payments from homeowners. That’s up roughly 6 percent from a year earlier.

Alongside the consumer loan business, Wells Fargo had gains in its wealth management business, a particular focus for the bank to defray the impact of federal regulations that dragged down profits elsewhere.

Still, Wells Fargo could see its profits from residential mortgages wane later this year if the Federal Reserve halts its extensive bond buying spree.

Working to move beyond the mortgage crisis woes that have dogged the bank, Wells Fargo has been brokering deals with federal regulators. Wells Fargo was one of 10 banks that this week signed onto an $8.5 billion settlement with the Comptroller of the Currency and the Federal Reserve over claims that shoddy foreclosure practices may have led to the wrongful eviction of homeowners.

The sweeping federal pact ends a deeply flawed review of millions of loans in foreclosure that was mandated by federal regulators in 2011. The review, which was ended this week, began in November 2011 amid mounting public fury that bank employees were churning through hundreds of foreclosure filings without reviewing them for accuracy.

In addition to the settlement, the bank set aside $1.2 billion to prevent foreclosures.

Article source: http://dealbook.nytimes.com/2013/01/11/wells-fargo-profit-jumps-24-percent-in-fourth-quarter-driven-by-mortgages/?partner=rss&emc=rss

Filed Under: Global Business Tagged With: , ,

DealBook: Banks See Home Loans as Gateway to Big Gains

October 12, 2012 by Leave a Comment

A Wells Fargo branch in Washington.Gary Cameron/ReutersA Wells Fargo branch in Washington.

8:35 p.m. | Updated

Federal stimulus has ignited a boom in mortgage refinancing, benefiting both homeowners and banks. And the good times could continue as the government steps up its support of the broad housing market.

The proof will be in the profits.

On Friday, Wells Fargo and JPMorgan Chase, the top two mortgage lenders in the country, are scheduled to report quarterly earnings. Their results — and the other bank reports that follow — will offer clues as to whether the current mortgage boom is sustainable or set to fizzle.

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“We expect mortgage revenue to continue to be elevated in the third quarter and possibly into next year,” said Jason Goldberg, a banking analyst at Barclays.

In the third quarter, banks probably originated as much as $450 billion of home loans, according to estimates by Inside Mortgage Finance, a publication that tracks the industry. That figure, which includes both refinances of existing mortgages and new loans to buy a house, would be a considerable jump from the previous period. In the second quarter, banks originated $405 billion, with 68 percent in refinancings.

A branch of JPMorgan Chase in Manhattan.Justin Sullivan/Getty ImagesA branch of JPMorgan Chase in Manhattan.

Since the financial crisis of 2008, some large banks have found themselves well positioned to make money when the mortgage market gets hot. The profits from making mortgages have helped banks at a time when lower interest rates have weighed on other sources of revenue.

The banks benefit because they act as middlemen in the mortgage machine. Instead of holding on to new mortgages that earn interest over a number of years, banks sell nearly all of them to investors after packaging them into bonds. The federal government, through entities like Fannie Mae, attaches a guarantee of repayment on the loans, making the bonds even more attractive to the investors.

When the banks sell the mortgages as bonds, they do so at a profit. This markup has become even bigger after the recent moves by the Federal Reserve and the Treasury Department to help the housing sector.

In September, the Fed announced plans to buy large amounts of mortgage-backed bonds. The proposal has driven the price of such securities higher, letting banks earn an even bigger financial gain when they sell mortgages into the market.

A Treasury program makes it easier for homeowners who are underwater, meaning their properties are worth less than their loans, to refinance. This initiative, coupled with the ultralow interest rates, has generated a flurry of refinancing activity, producing a windfall for banks.

Some analysts expect banks to keep churning out profits on mortgages. They think it unlikely refinancing will let up anytime soon, given that rates are expected to stay low for a while. The average rate on a 30-year fixed rate mortgage has dropped to 3.36 percent, from 3.95 percent at the end of 2011, according to Freddie Mac figures.

“I estimate that close to half of mortgages have an economic incentive to refinance,” said Paul Miller, a banking analyst at FBR Capital Markets.

Mr. Miller said he believed that with the current industry dynamics, the steady stream of refinancings would last for multiple quarters. Some banks are reluctant to expand their mortgage operations, meaning the market can handle only a limited volume of loans at a time.

These banks fear that entities like Fannie Mae, which guarantee the loans, have become a lot more demanding when asking banks to take back troubled loans. The so-called put-backs can quickly prompt losses that can surpass the income banks originally made on the loans. And although the quality of loans written since the crisis has been high, banks fear they could be swamped with put-backs if the economy slows.

“There’s a lot of uncertainty at the moment, and it does weigh,” said Mr. Goldberg of Barclays.

If banks remain nervous about increasing the amount of mortgages they originate, it only tightens the grip of the few dominant lenders, making it easier for them to determine the interest rates that ordinary borrowers pay and generate strong profits. Mortgage rates could be well under 3 percent, if the gains banks make when they sell the mortgages were at historical levels, according to an analysis by The New York Times this year.

Some of the top banks benefited from the wave of consolidation that occurred during the financial crisis. In the first half of 2012, for instance, Wells Fargo, which acquired Wachovia, and JPMorgan Chase, which consumed Washington Mutual, accounted for 44 percent of all mortgages, according to figures from Inside Mortgage Finance.

In the first half of 2012, Wells Fargo reported gains of $4.83 billion when originating mortgages, a 155 percent increase from $1.89 billion in the first half of 2011. JPMorgan’s mortgage production revenue was up 70 percent.

Still, some analysts are less certain about the strength of the refinancing boom. If Mitt Romney wins the presidential election, he could move quickly to overhaul housing finance in ways that could, at least temporarily, unsettle the mortgage market.

There are more immediate concerns, though.

“The biggest threat is a rise in interest rates,” said Guy Cecala, publisher of Inside Mortgage Finance. For many borrowers, refinancing would no longer make sense if mortgage rates went back up to, say, 3.75 percent.

Even if mortgage rates stay low, the big banks might finally start to see more competition. The temptation of bigger mortgage gains may come to outweigh the fears that some banks have.

“If this lasts longer than expected, you will see banks re-enter the game,” said Todd Hagerman, banking analyst at Sterne Agee Leach.


EARNINGS CALENDAR

Article source: http://dealbook.nytimes.com/2012/10/11/boom-in-mortgages-is-expected-to-benefit-banks-profits/?partner=rss&emc=rss

Filed Under: Global Business Tagged With: , ,

DealBook: Mortgage Refinancing Boom Is Expected to Benefit Banks

October 11, 2012 by Leave a Comment

A branch of JPMorgan Chase in Manhattan. The bank's mortgage production revenue was up 70 percent in the first half of 2012.Justin Sullivan/Getty ImagesA branch of JPMorgan Chase in Manhattan. The bank’s mortgage production revenue was up 70 percent in the first half of 2012.

Federal stimulus has ignited a boom in mortgage refinancing, benefiting both homeowners and banks. And the good times could continue as the government steps up its support of the broad housing market.

The proof will be in the profits.

On Friday, Wells Fargo and JPMorgan Chase, the top two mortgage lenders in the country, are scheduled to report quarterly earnings. Their results — and the wave of other bank reports that follow — will offer clues as to whether the current mortgage boom is sustainable or set to fizzle.

Related Links

“We expect mortgage revenue to continue to be elevated in the third quarter and possibly into next year,” said Jason Goldberg, a banking analyst at Barclays.

In the third quarter, banks probably originated as much as $450 billion of home loans, according to estimates by Inside Mortgage Finance, a publication that tracks the industry. That figure, which includes both refinances of existing mortgages and new loans to purchase a house, would be a considerable jump from the previous period. In the second quarter, banks originated $405 billion, with 68 percent as refinancings.

A branch of Wells Fargo in Daly City, Calif. The bank is scheduled to report quarterly earnings on Friday.Justin Sullivan/Getty ImagesA branch of Wells Fargo in Daly City, Calif. The bank is scheduled to report quarterly earnings on Friday.

Since the financial crisis of 2008, some large banks have found themselves well positioned to make money when the mortgage market gets hot.

It comes down to the advantageous role banks play as the middlemen in the mortgage machine. Instead of holding on to new mortgages that earn interest over a number of years, banks sell nearly all of them to investors after packaging them into bonds. The federal government, through entities like Fannie Mae, attaches a guarantee of repayment on the loans, making the bonds even more attractive to the investors.

When the banks sell the mortgages as bonds, they do so at a profit. This markup has gotten even bigger after the recent moves by the Federal Reserve and the Treasury Department to help the housing sector.

In September, the Fed announced plans to buy large amounts of mortgage-backed bonds. The proposal has driven the price of such securities higher, allowing banks to earn an even bigger financial gain when they sell their mortgages into the market.

A Treasury program makes it easier for homeowners who are underwater, meaning their properties are worth less than their loans, to refinance. This initiative — coupled with the ultralow interest rates — has generated a flurry of refinancing activity, producing a windfall for banks.

Some analysts expect banks to keep churning out profits on mortgages. They think it unlikely that there will be a letup in refinancing anytime soon, given that rates are expected to stay low for a while. The average rate on a 30-year fixed rate mortgage has dropped to 3.36 percent, from 3.95 percent at the end of 2011, according to Freddie Mac figures.

“I estimate that close to half of mortgages have an economic incentive to refinance,” said Paul Miller, a banking analyst at FBR Capital Markets.

Mr. Miller believes the steady stream of refinancings will last for multiple quarters. Some banks are reluctant to expand their mortgage operations, meaning the market can handle only a limited volume of loans at a time.

These banks fear that entities like Fannie Mae, which guarantee the loans, have become a lot more demanding when asking banks to take back troubled loans. The so-called put-backs can quickly prompt losses that can surpass the income that banks originally made on the loans. And though the quality of loans written since the crisis has been high, banks fear they could be swamped with put-backs if the economy slows.

“There’s a lot of uncertainty at the moment, and it does weigh,” said Mr. Goldberg, the Barclays analyst.

If some banks remain nervous about increasing the amount of mortgages they originate, it only tightens the grip of the few dominant lenders, making it easier for them to determine the interest rates ordinary borrowers pay and generate strong profits. Those rates could be well under 3 percent, if the gains banks make when they sell the mortgages were at historical levels, according to a New York Times analysis earlier this year.

Some of the top banks benefited from the wave of consolidation that occurred during the financial crisis. In the first half of 2012, for instance, Wells Fargo, which acquired Wachovia, and JPMorgan Chase, which consumed Washington Mutual, accounted 44 percent of all mortgages, according to figures from Inside Mortgage Finance.

In first half of 2012, Wells Fargo reported gains of $4.83 billion when originating mortgages, a 155 percent increase from $1.89 billion in the first half of 2011. JPMorgan’s mortgage production revenue was up 70 percent.

Still, some analysts are less certain about the strength of the refinancing boom. If Mitt Romney wins the presidential election, he could move quickly to overhaul housing finance in ways that could, at least temporarily, unsettle the mortgage market.

There are more immediate concerns, though.

“The biggest threat is a rise in interest rates,” said Guy Cecala, publisher of Inside Mortgage Finance. For many borrowers, refinancing would no longer make sense if mortgage rates went back up to, say, 3.75 percent.

Even if mortgage rates stay low, the big banks might finally start to see more competition. The temptation of bigger mortgage gains may come to outweigh the fears that some banks have.

“If this lasts longer than expected, you will see banks re-enter the game,” said Todd Hagerman, banking analyst at Sterne Agee Leach.


EARNINGS CALENDAR

Article source: http://dealbook.nytimes.com/2012/10/11/boom-in-mortgages-is-expected-to-benefit-banks-profits/?partner=rss&emc=rss

Filed Under: Global Business Tagged With: ,

High & Low Finance: Spain’s Banking Mess

September 23, 2011 by Leave a Comment

Just when markets were focused on the risks of a Greek default and the possibility of contagion to other countries, Spain’s central bank reported this week that things were getting worse for that country’s banks — but not because they held a lot of Greek debt or bonds issued by other troubled European economies.

The problem, instead, is the same old one. With Spain’s economy weak and home prices falling, bad loans are growing. And the central bank thinks things are getting worse.

In a surprisingly frank presentation to investors in London on Tuesday, José María Roldán, the Bank of Spain’s director general of banking regulation, said that Spanish land prices had fallen about 30 percent from the 2007 peak, adjusted for inflation, and that home prices were off about 22 percent. “In both cases, we expect further corrections in the years to come,” he said. For land prices, he said, the bank’s “baseline scenario” was that prices would fall to little more than half of the peak level. The “adverse scenario” indicated that the decline could be significantly worse.

That was a significant change from a presentation he made in February. Then, with home prices down about 18 percent from the peak, he argued that the decline was similar to past cyclical downturns and that prices were likely to begin rising soon.

Remarkably enough, collapsing home prices have not left Spanish banks holding large amounts of bad mortgage loans, thanks largely to the fact the Spanish mortgage market operated during the boom in far different ways than the American market.

But if lending to home buyers was conducted in a far more prudent manner than it was in the United States, lending to real estate developers and construction companies was, if anything, more irresponsible. The higher land prices went, the more eager the banks were to push out loans.

The story of how Spain’s banks got into the mess — and the way its mess differs from that of American banks — show that it is impossible for banks to walk away from a collapsing bubble in real estate. It also shows that the structure of mortgage markets can make a major difference in how a collapse plays out.

The figures released by the central bank this week showed that by the middle of this year, 17 percent of Spanish bank loans to construction companies and real estate developers were troubled — or “doubtful,” the term favored by the central bank. That figure has been rising rapidly, reflecting the deterioration in real estate values.

When the financial crisis first broke out, in 2008 and 2009, it appeared that Spanish banks were in a better position than most, in part because of regulation that had kept the big banks from making some of the mistakes others made.

But it turned out that smaller Spanish savings banks were heavily exposed to a real estate market that had outpaced even the United States’ market for a time during the first decade of this century. That market continued to rise after the American housing market stopped climbing.

The Bank of Spain has created a program to force mergers of the smaller banks and to bring in better management. It has put about 11 billion euros into the banks to recapitalize them, and is putting in another 15 billion euros in a process that is supposed to be completed by the end of this month, said Antonio Garcia Pascual, the chief Southern European economist for Barclays Capital. But, he added, “our estimate is that the overall number needed is closer to 50 billion euros.”

The banks are bleeding from loans secured by raw real estate, and from loans for construction. The pain is made worse because such lending soared during the property boom. It is those loans that are now devastating bank balance sheets, as developers who borrowed to build offices, stores and neighborhoods saw demand dry up and now cannot pay the banks back.

Other corporate loans are also showing weakness, as would be expected when unemployment is above 20 percent and not expected to improve for at least two years, but less than 5 percent of those loans are said to be doubtful. There are also signs of trouble in car loans and other loans to individuals.

Article source: http://feeds.nytimes.com/click.phdo?i=f6da842c869aa16d9f392bcda4104850

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