Bank of America just reported an earnings beat, but its mortgage business — a sector everyone's been watching — was a disappointment.
First-mortgage originations declined 46% from this time last year.
And BAC isn't alone in this. Both JP Morgan and Wells Fargo reported declines in their mortgage businesses yesterday. Wells Fargo managed to crush earnings through cost-cutting measures.
JP Morgan, weighed down by legal costs, was unable to do the same, and posted slightly disappointing numbers despite its earnings beat.
This decline didn't come out of nowhere. The Federal Reserve's recent survey of loan officers showed weaker demand for loan origination in both prime and nontraditional mortgage loans, according to FactSet.
That's a big change, as the same survey has reported a strong demand for prime mortgages over the last eight quarters before October. Even in July 2013, 50% of the loan officers the Fed surveyed were reporting strong demand.
Over at Bank of America, Consumer Real Estate Services posted a $1.1 billion loss. That's less than the same time last year (a $3.7 billion loss) but at that time, the bank had legal fees to pay out to Fannie and Freddie.
This time, the bank is clear about the fact that the decline is due to weaker demand:
CRES first-mortgage originations declined 46 percent in the fourth quarter of 2013 compared to the same period in 2012, reflecting a corresponding decline in the overall market demand for mortgages. Core production revenue declined in the fourth quarter of 2013 to $403 million from $986 million in the year-ago quarter due to lower volume as well as a reduction in margins resulting from the continued industrywide margin compression over the past year.
JP Morgan's mortgage origination saw a pretax loss of $274 million, "a decrease of $1.1 billion from the prior year, reflecting lower volumes, lower margins and higher legal expense, partially offset by lower repurchase losses."
Across the board, Wall Street banks put aside less money to deal with losses this quarter. BAC, for example, set aside $959 million less for its mortgage provision than it did at this time last year, putting its provision at $474 million. The bank cited "increased home prices and improved portfolio trends."
And that may be true. Banks are seeing less delinquency and reduced expenses, which is a solid reason to cut provisions.
But at the same time, they are still dealing with litigation (though less than they were before) and more importantly, they're seeing rising interest rates, which is hurting mortgage demand.
It's a delicate balance.
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