Wells Fargo expects mortgage turnaround

For a year now, Wells Fargo has been originating fewer and fewer mortgages even as it posts record earnings. But as the economy improves, executives at the San Francisco bank said Friday they believe the home-loans business will turn around this spring.

CEO John Stumpf said he’s seen signs that a resurgence in mortgage demand could be coming soon. Household debt has fallen to the lowest level since 2001, and employment continues to increase. Stumpf said he expects home values to rise an additional 4 to 5 percent in the coming year.

“As I travel around the country, there’s a lot of enthusiasm about housing,” he said. “We’re excited about the selling season.”

Wells, the nation’s largest home lender, once again reported record earnings in the first quarter, announcing Friday that it made a profit of $5.9 billion, or $1.05 per share. The results were up 14 percent from the same time period a year before, and solidly beat analysts’ expectations. It’s the 12th consecutive quarter in which Wells has recorded record profits.

But the results came primarily from setting aside less for bad loans and trimming expenses. Revenue fell to $20.6 billion, down 3 percent from last year.

Mortgage originations and mortgage banking income continued to slide. They’ve been on that path since last spring, when historically low interest rates began to creep up. That led fewer people to refinance their mortgages, stopping what had been a flood of new refinancings in 2011 and 2012. Big banks laid off thousands of mortgage processors across the country and in Charlotte as demand slackened.

At Wells Fargo, Friday’s results showed that the bank originated $36 billion in mortgages in the first quarter, only a third of last year’s volume. Wells Fargo also cut 1,100 mortgage jobs in the first quarter. Forty-six were in Charlotte, where Wells maintains an East Coast hub.

Chief Financial Officer Tim Sloan told analysts on a conference call that the bank is optimistic the spring home-selling season will bring growth in origination volume.

He pointed to $27 billion worth of mortgages in the works at the end of the first quarter as evidence the market might be turning around. The so-called “pipeline” was up slightly from $25 billion at the end of the fourth quarter of 2013.

“Our mortgage team is poised and ready to take advantage of opportunities,” Sloan said.

Wells Fargo is the largest U.S. mortgage originator and servicer and is often viewed as an indicator for the mortgage industry as a whole.

Raymond James analyst Anthony Polini said mortgage banking appears to be bottoming out across the industry.

“The industry as a whole is losing momentum from mortgage banking this year – a lot,” Polini said. “There’s not much you can do.”

To see a rise in mortgage revenues, banks would need interest rates to rise or the economy to improve so that more people will buy homes, Polini said.

Guy Cecala, publisher of Inside Mortgage Finance, said Wells Fargo is well-positioned to boost originations going forward because it has such a large share of the nation’s home purchase business.

At the end of last year, Wells’ market share had fallen to 16.7 percent, Cecala said, from a high of more than 30 percent. The bank has lost market share over time as more lenders have entered the business, he said. Still, Wells Fargo continues to have the largest market share among mortgage originators, he said.

Wells Fargo shares closed up about 1 percent Friday, at $48.08.

Wells Fargo was again one of the first big banks to report quarterly results.

JPMorgan Chase also reported Friday, missing Wall Street’s expectations by earning $1.28 per share. Its earnings were down 20 percent as its bond trading and mortgage businesses posted disappointing results.

Bank of America will report its earnings Wednesday. Its results are expected to be severely hampered by a $9.5 billion settlement announced late last month with the Federal Housing Finance Agency, which oversees mortgage giants Fannie Mae and Freddie Mac. Staff writer Deon Roberts contributed.