Bank of America (BAC) joined its banking peers by announcing better than expected second quarter earnings on Wednesday, with Q2 profit jumping 63% to $4 billion versus a profit of $2.5 billion from a year ago. Earlier this week Goldman Sachs (GS), Citigroup (C), and JPMorgan Chase (JPM) all released positive earnings based on stronger trading volume in the prior quarter. There was one dark cloud hovering over the reports: both Wells Fargo (WFC) and JPMorgan warned that mortgage-refinancing applications have declined, and the apparent slowdown in the U.S. mortgage market could hamper future profits.
These reports don't surprise Chris Whalen, executive vice president at Carrington Investment Services, a firm that specializes in real estate investment and residential mortgage specialization. In an interview with The Daily Ticker, he argues that the rebounding housing market has not been a boon for banks' bottom line.
“The last couple of years have all been refinancing volumes,” Whalen says. “We have not seen a pick up in purchase volumes for homes. We’ve run out of customers in a sense of refinancing.”
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Banks may be overly cautious about providing loans for new mortgages, but they are eager to extend credit to Americans seeking auto and credit loans, short assets that won’t “penalize” them, Whalen says.
“The regulatory environment has tightened up the criteria for lending so banks are very reticent about lending to that bottom third of the total population,” Whalen explains. “If you don’t see credit on bank balance sheets growing, then you can’t get terribly bullish on the future.”
Moreover, the lower number of mortgage applications has negative consequences for the housing market and potentially the broader U.S. economy, he says.
“You haven’t seen the credit growth you’d expect,” from recent housing data such as the S&P/Case-Shiller Home Price Index, Whalen expounds. “We need credit growth to grow jobs.”
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