By Peter Rudegeair
July 12 (Reuters) - Unexpectedly large quarterly profits at JPMorgan Chase & Co and Wells Fargo & Co hide a more worrisome forecast for the rest of the year for many U.S. banks. Things could get worse before they get any better.
Wells Fargo's profit was buoyed in the second quarter by consumers rushing to refinance their mortgages and buy new homes, driven by record low interest rates and a recovering housing market. JPMorgan's mortgage lending helped the bank for much of 2012, and second-quarter results this year were by some measures strong too - it made more loans, even if its pretax profits from lending fell 37 percent.
But mortgage lending is likely to be less of a support for banks going forward, as the U.S. Federal Reserve has started talking about tapering off its massive bond-buying program and borrowing rates for home loans have jumped. Thirty-year mortgage rates rose to 4.58 percent at the end of the second quarter, up 0.82 percentage point from the first quarter.
Executives from both banks, which between them make one in three U.S. home loans, said on Friday that mortgage lending volumes would decline in the coming months and so profits from the business would fall. JPMorgan Chief Financial Officer Marianne Lake said rising mortgage rates could slash volume by 30 percent to 40 percent. That would result in a "dramatic reduction in profits" in the business, JPMorgan Chief Executive Officer Jamie Dimon said.
At the same time economic growth has not ramped up enough for the rest of these banks' businesses - such as small business loans and credit cards - to make up for the loss of that income. There may be a lull between the drop-off in mortgage lending and the boost to other forms of revenue from an improving economy and higher long-term interest rates.
"If the economy is getting stronger, it's not manifesting itself in terms of balance sheet growth of the banks," said Christopher Mutascio, a banking analyst at Keefe, Bruyette & Woods. "Mortgage headwinds are a bit more instantaneous, and the pick-up in the other business lines may take some time."
A more complete outlook for the banking industry will emerge next week when both Citigroup Inc and Bank of America report their earnings.
"NO GROWTH" IN THE MORTGAGE BUSINESS
The looming problem is not lost on the banks and could lead to further cost cutting as they try to bridge the gap.
JPMorgan's Lake said depending on market conditions the bank could accelerate its previously announced cost-cutting targets. In February, the largest U.S. bank had said it planned to cut 17,000 jobs by the end of 2014, or roughly 6.6 percent of its workforce. The job cuts were largely targeted at areas such as mortgage banking and retail banking.
To some extent, banks' mortgage businesses have built-in hedges in the form of income from collecting payments on home loans. As rates increase and fewer homeowners refinance their mortgages, banks earn more from collecting payments on existing loans.
But mortgage lending revenues dwarfs servicing revenues at present at many banks. At Wells Fargo, for instance, servicing accounted for just 4 percent of fee income in the second quarter, compared to 22 percent for mortgage lending.
Though servicing income does provide a bit of a natural balance, it should not be viewed "to dollar-for-dollar offset any reduction in revenues from the origination side of the business," Wells Fargo's Chief Financial Officer Tim Sloan said.
Wells Fargo also signaled that its streak of seven consecutive quarters of making more than $100 billion of home loans is likely coming to an end soon.
"We just don't think that we are going to see $100 billion of mortgage volume, given the current rates today, in the third quarter," Sloan said. "We will need to go ahead and make some adjustments."
Across the U.S. market, refinancing activity fell 44 percent in the second quarter, according to data from the Mortgage Bankers Association. At Wells Fargo, refinancing made up 56 percent of all mortgage loans in the second quarter and over 60 percent of mortgage loans for the preceding four quarters. At JPMorgan, refinancing made up around three-fourths of all home loans in the past year.
"There's no growth in their mortgage business, and their mortgage application pipeline is down," said Oliver Pursche, president of Gary Goldberg Financial Services, which has $650 million in assets under management.
OTHER LOANS COULD PICK UP THE SLACK, OVER TIME
To be sure, continued economic recovery will contribute to earnings in more immediate ways as well: It will allow banks to set aside less money to cover loan losses, and dip into existing reserves. In the second quarter, JPMorgan released $1.5 billion from its loan loss reserves. Wells Fargo released $500 million and said it expected more in the coming quarters if the economy continues to grow.
For its part, Wells Fargo is confident that its diversified business model will allow it to prosper over time, if not every single quarter.
"The mortgage horse has been a big, strong horse. We've got 89 other horses that are going to be able to grow," Sloan said, referring to Wells Fargo's stagecoach logo.
But growth in other businesses such as commercial and consumer loans that are expected to eventually make up for lost mortgage revenues are yet to materialize.
Total loans at JPMorgan fell by $3 billion to $725 billion in the second quarter, while total loans at Wells Fargo rose only $2 billion to $802 billion - both compared with the first quarter.
Consumer loans were up only $250 million in the second quarter at Wells Fargo, and the bank's commercial clients did not exhibit any increased demand for credit.
"I wish they were, but unfortunately not. When you look at (credit) line usage in the commercial side, it has been pretty stagnant for a bit," Sloan said. "There's no question there's going to be a bit of a lag effect as it relates to stronger commercial loan growth." (Reporting by Peter Rudegeair in New York; Additional reporting by Lauren Tara LaCapra in New York; Editing by Paritosh Bansal and Lisa Shumaker)
10. SunTrust Banks Inc.
Loans in foreclosure: 6,001 Avg. property value: $207,157 Pct. seriously underwater: 64% More than 6,000 loans serviced by SunTrust Banks Inc. (NYSE: STI) were in foreclosure as of February. Like most U.S. banks, SunTrust has been embroiled in controversy over its lending and foreclosure practices in recent years. SunTrust was one of five major lenders that in November agreed to pay a combined $162 million to settle complaints that it charged improper fees on home finance loans for veterans. Earlier in 2012, the bank agreed to pay $21 million to settle allegations that it overcharged more than 20,000 Hispanic and African American borrowers between 2005 and 2009. <a href="http://247wallst.com/2013/03/12/banks-foreclosing-on-the-most-homes/#ixzz2OIWRGmT8" target="_blank"> Read More At 24/7 Wall St. </a>
9. PNC Financial Group
Loans in foreclosure: 8,545 Avg. property value: $185,306 Pct. seriously underwater: 55% PNC Financial Group Inc. (NYSE: PNC) serviced more than 8,500 loans in the foreclosure process as of last month. The average property value was just $185,306, one of the lowest of all banks, and the average debt on these mortgages was $202,286. Of the 8,545 loans in the foreclosure process, approximately 55% were considered seriously underwater. At the end of 2012, PNC was the 10th largest mortgage servicer in the country, with a portfolio size of $169.4 billion. PNC was recently required to pay $70 million in order to settle allegations of illegal foreclosure practices. <a href="http://247wallst.com/2013/03/12/banks-foreclosing-on-the-most-homes/#ixzz2OIWRGmT8" target="_blank"> Read More At 24/7 Wall St. </a>
8. HSBC Holdings
Loans in foreclosure: 16,317 Avg. property value: $233,670 Pct. seriously underwater: 60% More than 16,000 loans serviced by HSBC Holdings PLC (NYSE: HBC) were in the foreclosure process as of February 2013. Six in 10 of these mortgages were considered seriously underwater. In January, the bank agreed to pay $249 million to settle complaints that it had wrongfully foreclosed on U.S. homeowners. Under the terms of the settlement, the bank paid out $96 million to 112,000 homeowners, while the remainder of the money went to reducing mortgage balances and forgiving outstanding principal on short sales, or selling a property for less than what is owed. Earlier this month, HSBC announced it was selling $3.2 billion worth of consumer loans to trim down U.S. operations <a href="http://247wallst.com/2013/03/12/banks-foreclosing-on-the-most-homes/#ixzz2OIWRGmT8" target="_blank"> Read More At 24/7 Wall St. </a>
Loans in foreclosure: 27,697 Avg. property value: $202,390 Pct. seriously underwater: 54% Citigroup Inc. (NYSE: C) serviced $6.3 billion in outstanding mortgage debt on homes in foreclosure, the seventh highest amount of all banks. Of homes in the foreclosure process, 54% were considered seriously underwater. While this figure is high, it was better than most of the nation’s largest banks. Citigroup is still fighting court battles regarding its mortgage practices as authorities accuse it of unfairly evicting people from their homes. These legal proceedings continue to hurt the company’s bottom-line. <a href="http://247wallst.com/2013/03/12/banks-foreclosing-on-the-most-homes/#ixzz2OIWRGmT8" target="_blank"> Read More At 24/7 Wall St. </a>
6. Bank of New York Mellon
Loans in foreclosure: 31,821 Avg. property value: $236,703 Pct. seriously underwater: 67% At the end of 2012, Bank of New York Mellon Corp. (NYSE: BK) had $1.4 trillion under management and more than $26 trillion under custody. A core focus of the company’s business is its function as a custodian, tasked with safeguarding financial assets and handling various monetary and financial transactions. During the financial crisis, the Treasury Department named the bank as custodian for its bailout fund — meaning the bank provided record keeping and cash management for the fund. Although BNY Mellon is not a loan servicer responsible for executing the foreclosure process on delinquent loans, it is listed as the plaintiff or beneficiary in nearly 32,000 foreclosure proceedings nationwide, according to RealtyTrac data. The bank is listed because it acts as trustee on certain mortgage-backed securitizations, which are created when a large number of mortgage loans are pooled and placed in a trust. Foreclosure action related to properties held in the trust must be brought in the trustee’s name even though the trustee is not involved in the day-to-day foreclosure proceedings. <a href="http://247wallst.com/2013/03/12/banks-foreclosing-on-the-most-homes/#ixzz2OIWRGmT8" target="_blank"> Read More At 24/7 Wall St. </a>
5. Deutsche Bank
Loans in foreclosure: 33,608 Avg. property value: $228,446 Pct. seriously underwater: 63% In January 2007, Deutsche Bank A.G. (NYSE: DB) bought home loan provider MortgageIT for $430 million. Soon after, the U.S. housing market collapsed. In May 2012, the bank agreed to pay the U.S. federal government more than $200 million to resolve charges that MortgageIT misrepresented the quality of mortgage loans it insured on behalf of the Federal Housing Administration. Three years ago, Deutsche Bank also paid the Federal Deposit Insurance Corporation $54 million to settle allegations against MortgageIT. While Deutsche Bank does not have a servicing arm, it acted as a trustee on more than 33,000 loans in the foreclosure process across the country, twice the number of any other non-U.S. bank.
4. U.S. Bancorp
Loans in foreclosure: 44,881 Avg. property value: $206,754 Pct. seriously underwater: 62% Nearly 45,000 loans serviced by U.S. Bancorp (NYSE: USB), with a cumulative property value of just under $9.3 billion, were in default as of February. About 28,000, or 62%, of all mortgages in foreclosure were considered seriously underwater. The bank was among the 10 financial institutions that agreed to pay $8.5 billion to settle allegations of widespread mortgage abuse in the foreclosure process, with U.S. Bancorp’s share of the payments totaling $80 million. The bank was the third-largest mortgage originator in 2012, lending $84.5 billion. This was up significantly from the $49.1 billion it lent in 2011. <a href="http://247wallst.com/2013/03/12/banks-foreclosing-on-the-most-homes/#ixzz2OIWRGmT8" target="_blank"> Read More At 24/7 Wall St. </a>
3. JPMorgan Chase
Loans in foreclosure: 54,325 Avg. property value: $208,183 Pct. seriously underwater: 54% As of February 2013, J.P. Morgan Chase & Co. (NYSE: JPM) serviced nearly 55,000 mortgages that were in the foreclosure process, worth $11.4 billion. Fortunately for the bank, just 54% of those homes in foreclosure were considered seriously underwater, a significantly lower percentage than banks such as Bank of New York Mellon and Deutsche Bank. The bank was able to provide more loans in 2012 than it did in previous years. That year, the bank was responsible for 10% of all mortgage loans in the United States, worth $182.2 billion. This was up from the $146.7 billion the company had lent in 2011. <a href="http://247wallst.com/2013/03/12/banks-foreclosing-on-the-most-homes/#ixzz2OIWRGmT8" target="_blank"> Read More At 24/7 Wall St. </a>
2. Wells Fargo
Loans in foreclosure: 84,903 Avg. property value: $205,550 Pct. seriously underwater: 56% Wells Fargo & Co. (NYSE: WFC) serviced $19.9 billion in total mortgage debt, a higher figure than any other bank except for Bank of America. Wells Fargo’s past lending practices received intense scrutiny in the past several years. The bank was one of the 10 servicers that participated in the $8.5 billion mortgage settlement announced in January. The bank was also required to pay $175 million in 2012 to settle accusations that it discriminated against African American and Hispanic customers between 2004 and 2009. Despite these troubles, Wells Fargo was the largest mortgage lender in the U.S. during 2012, originating 28% of all mortgages, worth $524 billion. <a href="http://247wallst.com/2013/03/12/banks-foreclosing-on-the-most-homes/#ixzz2OIWRGmT8" target="_blank"> Read More At 24/7 Wall St. </a>
1. Bank of America
Loans in foreclosure: 96,319 Avg. property value: $203,956 Pct. seriously underwater: 61% Bank of America Corp. (NYSE: BAC) serviced more loans for homes in foreclosure than any other bank in America as of February, at more than 96,000. In all, these properties had more than $23 billion in mortgage debt, and 60% of them were seriously underwater. The bank’s purchase of mortgage lender Countrywide Financial has been especially criticized. As of mid-2012, the acquisition was believed to have cost Bank of America over $40 billion. According to Mortgage Daily, the bank is taking a step back in both mortgage lending and servicing. In 2012, it cut the amount of mortgage loans it originated from $156.1 billion to $78.7 billion, while cutting its mortgage servicing operations by 21%. <a href="http://247wallst.com/2013/03/12/banks-foreclosing-on-the-most-homes/#ixzz2OIWRGmT8" target="_blank"> Read More At 24/7 Wall St. </a>