Residential mortgages are forecasted to be a bright spot in the second-quarter earnings of both large banks and nonbanks, according to a report from Kroll Bond Rating Agency.
That's even better news given that investors pay close attention to mortgage businesses during the second quarter since it is usually the start of the home buying season.
However, despite the increase in volume, KBRA said the loan growth for the U.S. banking industry as a whole is likely to remain constrained by regulatory factors.
Looking back, “The residential mortgage sector performed strongly in the first half of 2015, with both banks and nonbanks showing double digit volume increases sequentially and year-over-year,” the KBRA report stated.
Both Wells Fargo (WFC) and JPMorgan Chase (JPM) already reported their second-quarter earnings Tuesday morning, with each one beating analyst expectations.
Wells Fargo’s mortgage originations came in at $62 billion, up from $49 billion in prior quarter. Applications were at $81 billion, down from $93 billion in prior quarter.
Meanwhile, JPMorgan’s mortgage banking net income wasn’t as strong and came in at $584 million, a decrease of 20%. Net revenue was $1.8 billion, a decrease of 21%, driven by lower net servicing revenue and lower repurchase benefit.
Bank of America (BAC), Citigroup (C) and Goldman Sachs (GS) will release their earnings later this week.
This still leaves the growing nonbank industry to report their earnings a little later on in the earnings line-up.
“Nonbank firms continue to slowly grow their share of lending and servicing in the 1-4 family mortgage sector,” the KBRA note said.
Even with the frequent expressions of concern about the growth in nonbank mortgage lending and servicing, however, KBRA noted that the market share of commercial banks operating in the residential mortgage market remains high by historical standards.
Nonbank mortgage servicers currently account for less than 30% share of the loan-servicing segment.
In the first quarter, the largest nonbank lender, Quicken Loans, saw volumes jump 70% YOY to $19.3 billion and 3.8% sequentially for a 5.4% market share.
And the second largest nonbank lender, PHH Corporation (PHH), saw lending volumes rise 26% YOY to $9 billion for a market share of 2.5%.
But even with a strong forecast for the first half of the year, the second half of the year is not projected to do as well.
“Large banks are likely to benefit from rising residential mortgage origination volumes, but bank lending volumes remain relatively flat for the industry as a whole. While the large-cap bank lenders such as WFC and BAC are trying to grow volumes, these institutions are coming off of greatly reduced market share positions and continue to focus on relatively high-FICO, low loan-to-value loans,” the KBRA report stated.
KBRA said that rising interest rates are likely to put downward pressure on lending for mortgage refinancing, raising the possibility that overall lending volumes could weaken in the second half of 2015 if purchase volumes do not materialize as hoped.
“That said, even moderate weakening of mortgage application and lending volumes will still leave the overall supply of credit for the real estate sector above levels of the past three years. A mere 10% increase in overall mortgage lending volumes – half of most estimates for 2015 – would still be welcome news,” the report concluded.
