Banks to Suffer Big Decline in Mortgage Revenue in 2013

Tickers in this article: BBT FITB STI WFC

NEW YORK ( TheStreet) -- Regional banks enjoyed a blowout 2012 for mortgage revenue. But that may all come to an end this year.

That means investors can no longer count on a steady stream of glowing earnings-season headlines for mortgage growth or upward earnings-estimate revisions.

President Obama early last year expanded the Home Affordable Refinance Program, or HARP, to allow qualified borrowers with mortgage loans held by Fannie Mae (FNMA) or Freddie Mac (FMCC) to refinance at record-low interest rates, no matter how much the market value of the underlying home had declined.

The expanded HARP, along with record-low interest rates, led to a 39% year-over-year increase in U.S. mortgage loan origination volume to $1.75 trillion during 2012, according to the Mortgage Bankers Association (MBA). The low-rate environment also generated unusually high gains on the sale of newly originated loans to government-sponsored enterprises, including Fannie Mae and Freddie Mac.

Many of the large regional mortgage lenders saw continual increases in mortgage lending volume and profit last year, but gain-on-sale margins were already beginning to soften during the fourth quarter.

Projecting Declines in Margins and Volume


The MBA estimates that total U.S. mortgage origination volume will decline by 19% to $1.41 trillion this year, and drop another 25% to $1.061 trillion in 2014.

The Federal Reserve has kept the short-term federal funds rate in a record-low range of between zero and 0.25% since late 2008, and the Federal Open Market Committee has said this "highly accommodative" policy is likely to continue until the U.S. unemployment rate declines to 6.5%. But investors are always looking ahead, and the market yield for 10-year U.S. Treasury bonds has increased by 42 basis points over the past three months to around 2%.

Atlantic Equities analyst Richard Staite said in a Jan. 29 report that a concurrent increase in yields on mortgage-backed securities (MBS) led to a contraction in the primary secondary mortgage spread to 82 basis points from an average of 123 during the fourth quarter.

Jefferies analyst Ken Usdin said in a report Friday that the median gain-on-sale margin for eight large-cap banks covered by his firm expanded to 3.16% in 2012 from 1.94% in 2011. Usdin also estimated that the median gain-on-sale margin would decline to 2.75% in 2013 and 2.33% in 2014. These combined figures exclude Regions Financial of Birmingham, Ala., because "it does not offer the same granularity" as other large-cap regional banks covered by Jefferies, according to Usdin.

Jefferies also said mortgage production revenue for the group of eight large-cap banks more than doubled in 2012. The firm estimates that their mortgage production revenue will decline by 19% during 2013 and by another 24% in 2014.

Usdin says Wells Fargo (WFC) will take the biggest hit on gain-on-sale margins during 2013, with the margin declining by 43 basis points to 1.92%, dropping further to 1.55% in 2014. Jefferies also estimates that Wells Fargo's mortgage production revenue will decline to $8.79 billion in 2013 from $12.2 billion. For 2013, Usdin estimates Wells Fargo's mortgage production revenue will total $6.63 billion.