Like its nonbank competitors, Wells Fargo, JPMorgan Chase and Bank of America operated in a highly challenging mortgage market in 2022. But quarterly earnings released on Friday also revealed that the top depository lenders struggled more than the overall mortgage market in the final three months of the year, perhaps an omen of what’s to come.
“The fourth quarter results were weaker than we expected,” a team of mortgage lending analysts at Keefe, Bruyette & Woods wrote in a report.
“Volumes came in much lighter than industry expectations and margins were also below what we were expecting; we had thought 3Q22 results were trough levels,” they added.
Wells Fargo, the third-largest U.S. mortgage lender by volume, originated $14.6 billion in mortgages from October to December, down 32% quarter-over-quarter and 70% year-over-year. Refinancings fell to 13% of the portfolio in Q4 2022, compared to 59% in Q4 2021.
Meanwhile, at JPMorgan Chase, the fifth-biggest mortgage lender in the country, origination volume totaled just $6.7 billion in Q4 2022, a decline of 45% compared to the prior quarter and an 84% drop from Q4 2021.
Bank of America, number 10 among the top U.S. mortgage lenders, produced $5.2 billion in mortgages during Q4 2022, a 40% drop from $8.7 billion recorded in the previous quarter and 77% below the $23 billion notched in Q4 2021.
According to KBW analysts, the group’s volume declines are well below the Mortgage Bankers Association (MBA) forecast of a 17% origination drop in Q4 2022.
They also show what to expect from nonbank mortgage originators, such as Rocket, United Wholesale Mortgage, Pennymac, Rithm Capital and Mr. Cooper, which will report their earnings in the coming months.
“We expect mortgage banking earnings to remain under pressure as the industry works on removing capacity and cutting expenses to match very low volume levels,” the KBW’s analysts wrote.
A new mortgage strategy for Wells Fargo
To survive an ‘unforgiving’ mortgage market and work to restore its reputation, Wells Fargo has decided to exit the correspondent channel, reduce its servicing portfolio and focus on originating in-house loans with minority borrowers.
It will be an adjustment for the bank. Its correspondent channel was responsible for $6.4 billion of the total production in the fourth quarter, about 44% of total origination volume. Its correspondent footprint, however, has been shrinking. It declined 30% quarter-over-quarter and 58% year-over-year. The retail channel, with $8.2 billion in volume from October to December, fell 34% compared to the previous quarter and 75% compared to the same quarter in 2021.
Last year, Wells Fargo’s total originations declined 47% to $108 billion.
Ultimately, the bank’s mortgage servicing rights – carrying value (period-end)– decreased by 5%, falling from $9.8 billion in the third quarter of 2022 to $9.3 billion in the fourth quarter. Compared with Q4 2021, servicing UPB increased by 35%. The net servicing income rose 16% quarter-over-quarter to $94 million but was down 25% year-over-year.
Competitor JPMorgan Chase is also reducing its footprint in the correspondent channel, which it uses to fund a high volume of jumbo mortgages.
The bank originated $2.1 billion in the fourth quarter of 2022 through the correspondent channel, down 89% year-over-year and 51% quarter-over-quarter.
Through its retail channel, origination volume reached $4.6 billion in Q4 2022, a decrease of 79% year-over-year and 41% quarter-over-quarter.
In 2022, JPMorgan Chase’s originations totaled $65.4 billion, down 60% from 2021. Correspondent originations fell 62% and retail declined 58%.
JPMorgan’s mortgage servicing rights increased to $8 billion in Q4 2022 from $5.5 billion in Q4 2021. The net mortgage servicing revenues declined to $47 million in Q4 2022, from $220 million in Q3 2022 and a loss of $15 million in Q4 2021.
BofA, which saw its mortgage originations decline 44% in 2022 to $44.7 billion, is upping its bet on home equity products.
BofA’s home equity originations increased to $2.6 billion in Q4 2022 from $2.4 billion in the previous quarter and $1.7 billion in Q4 2021. In 2022, home equity volumes increased to $9.6 billion from $4.9 billion in the previous year.
The bank had $229.4 billion in outstanding residential mortgages on its books through Dec. 31, up from $228.4 billion on Sep. 30 and $219 billion on Dec. 31, 2021. The home equity portfolio was $27 billion at the end of Q4 2022, down slightly from $27.2 billion in the previous quarter and $28.8 billion in Q4 2021.
Bank of America’s total mortgage-backed securities reached a $35 billion in fair value as of Dec. 31.
A tough year for mortgage banking
The mortgage business brought in less revenue for the banks in 2022, as surging rates sapped borrowers’ demand for the product, especially refinancings.
Wells Fargo reached $786 million in revenues related to its home lending business in Q4 2022, decreasing from $973 million in the prior quarter (-19%) and $1.8 billion in the same quarter in 2021 (-57%). In 2022, revenues declined 48% to $4.2 billion.
The bank’s mortgage banking noninterest income came in at $79 million in Q4 2022, a decrease from $324 million in the previous quarter and $1 billion in the same period of 2021. In 2022, noninterest mortgage income declined 72% to $1.3 billion.
JPMorgan Chase also fared poorly in the fourth quarter. Its home lending net revenue reached $584 million in Q4 2022, down 37% compared to the prior quarter and 46% to the same quarter in 2021.
Overall, Wells Fargo delivered a $2.9 billion profit in Q4 2022, compared to $3.5 billion in the previous quarter. The result was impacted by $3.28 billion in operating losses related to litigation, $1 billion in impairments and $353 million in severance expense, mainly associated with the home lending business. The bank’s profit in 2022 declined 39% to $13.2 billion.
In a settlement with the Consumer Financial Protection Bureau (CFPB), the bank will pay $1.7 billion in a civil penalty related to automobile lending, consumer deposit accounts and mortgage lending. The bank imposed several layoffs that affected its mortgage operations, cutting hundreds of jobs alone in December.
“Rising interest rates drove strong net interest income growth, credit losses have continued to increase slowly, but credit quality remained strong, and we continue to make progress on our efficiency initiatives,” Charlie Scharf, Wells Fargo’s CEO, said in a statement.
JPMorgan posted $11 billion net income in the fourth quarter, compared to $9.7 billion in the previous quarter and $10.4 billion in the same quarter of 2021. In 2022, the bank delivered a $37.6 billion profit, down 22% year-over-year.
Jamie Dimon, chairman and CEO, said in a statement that the U.S. economy remains strong, with consumers still spending excess cash and businesses healthy. Still, the bank does not know the ultimate effect of geopolitical tensions and persistent inflation. “We remain vigilant,” he said.
BofA delivered $7.1 billion in net income from October to December, steady in comparison with the previous quarter and 2% higher than the same period in 2021. However, chairman and CEO Brian Moynihan said in a statement the bank ended the year on a strong note amid “an increasingly slowing economic environment.”
Following the earnings reports, Wells Fargo’s stock traded up 1.33% on Friday afternoon, followed by Bank of America’s stock increasing 1.70% and JP Morgan’s stock rising 2.60% from the previous day.
