Mortgage Blog

Biggest Banks on Different Paths When It Comes to Mortgages

I got it from subscription. But this is not only good to have
some ideas about the mortgage industry. And it might help
how we invest on the bank stocks.

Wells Fargo & Co. and Bank of America used to be equals in the
mortgage business back in 2010 when each originated over $70
billion in single-family loans.

The two giants are the largest retail mortgage originators in
the U.S., but their latest earnings reports show they are currently
walking down two separate paths.

B of A’s refinancings continued to dominate originations during
the fourth quarter and its purchase mortgage share was just 32%.

San Francisco-based Wells Fargo’s purchase mortgage loans comprised
68% of its fourth-quarter originations.

“They have been doing some pretty provocative things to make
that happen,” says David Lykken, managing partner at consultancy
Mortgage Banking Solutions. “They are working through the branches,
they are working through the call centers, and they are working
through town hall events with Realtors.”

Big banks generally need some time to flip the switch from refi
mode to purchase mode because their operations are so extensive
and they tend to be more geared toward internal customers than
external referral sources.

“When the refinance market dries up or is significantly reduced,
I don’t care how many signs you post in the branch, those channels
don’t work well,” he says, noting that Bank of America’s purchase
share is increasing and it is working on more aggressively courting
that market.

“The biggest problem for banks is if they don’t get the results
they want, they come and they go. They need more consistency,”
Lykken says.

B of A originated $13.5 billion in residential mortgages in the
fourth quarter, compared to $22.5 billion a year ago. Wells Fargo,
the nation’s largest mortgage lender, originated $23 billion in
loans through its retail channel, compared to $61 billion in the
fourth quarter of 2012.

“We are very excited about the transition into a purchase-driven
market,” said WFC chief financial officer Tim Sloan. “We think
we have a great opportunity because we have the biggest retail
sales force in the market. We believe we can grow over time,”
he added.

Bank of America, based in Charlotte, N.C., dropped out of the
correspondent business nearly two years ago and WFC stuck with
its correspondent lenders.

Overall, Wells Fargo originated $50 billion in loans in the
fourth quarter and $125 billion a year ago.

When it comes to servicing, B of A has dramatically reduced
the size of its mortgage servicing business over the past
four quarters, while WFC’s servicing portfolio has remained
stable at $1.8 trillion.

B of A serviced $810 billion in loans in the fourth quarter,
down from $1.3 trillion in the fourth quarter of 2012.

Overall, Bank of America bank reported $848 million in mortgage
banking income for the fourth quarter, compared to a loss of
$540 million a year ago.

Wells Fargo reported $1.6 billion in mortgage banking income,
down from $3 billion in the fourth quarter of 2012.

The big elephant in the room is that B of A bought Countrywide
Home Loans during the financial crisis and Wells Fargo purchased
Wachovia.

Countrywide turned out to be an expensive disaster for B of A.
Wachovia has been less of a headache for Wells.

“B of A has so many divergent voices within their operation and
they are still dealing with some (legacy assets from Countrywide),”
Lykken says, who considers its circumstance versus Wells to be a
bit of an “apples and oranges comparison.”

Bank of America may be selling servicing now to reap the lucrative
gains currently in the market and control costs with plans to
return to retaining it down the road, he says.

Wells Fargo is in the lead in originations so far, but “B of A
is looking to replicate this and getting back into this in a
bigger way once they figure out their level of commitment and
resolve some internal debate.”

The story may be different by 2015, Lykken says.

“You could see B of A coming in and eclipsing Wells,” he says.