Wells Fargo and JP Morgan Chase, the country’s top depository lenders, saw mortgage production volume further decline in the first three months of 2023, signaling another tough quarter for the mortgage industry.
Wells Fargo, the fourth-largest U.S. mortgage lender by volume, originated $6.6 billion in mortgages in the first quarter of 2023, which was down 55% quarter over quarter and 83% compared to $37.9 billion in Q1 2022. Refinance increased to 16% of the portfolio in Q1 2023 compared to 13% in Q4 2022 — but still lower than the 56% from Q1 2022.
The drop in production volume was widely anticipated, as Wells Fargo announced its plan to exit correspondent lending and shrink its retail mortgage business footprint earlier this year.
About $5.6 billion in origination came from the retail channel in the first quarter, down 32% from the previous quarter’s $8.2 billion. Production volume in the retail channel dropped 77% from $24.1 billion during the same period in 2022.
In January, Wells Fargo halted its acceptance of applications from the correspondent channel. In turn, production volume in the correspondent channel dropped to $1 billion in Q1 2023, down from $6.4 billion in Q4 2022 and $13.8 billion in Q1 2022.
“Our strategy includes broadening our existing investment from the Special Purpose credit program to include purchase loans, investing an additional 100 million dollars to advance racial equity and homeownership and deploying additional home mortgage consultants in local minority,” Mike Santomassimo, Wells Fargo chief financial officer, reiterated to analyst in its earnings call on Friday.
JP Morgan, the fifth-largest mortgage lender in the country, reported origination volume of $5.7 billion in Q1 2023, a 15% decline from the previous quarter’s $6.7 billion — and a 77% drop from $24.7 billion in Q4 2021.
JP Morgan Chase has also been reducing its footprint in the correspondent channel, which it uses to fund a high volume of jumbo mortgages. While origination in the correspondent channel was unchanged from Q4 2022 to the first quarter of 2023 at $2.1 billion, it was down 78% from the $9.6 billion in Q1 2022.
Bank’s home lending struggles
While JP Morgan Chase’s home lending net revenue rose 23% quarter over quarter to post $720 million in Q1 2023, it was down 38% from $1.17 billion in the same quarter in 2021.
“Home lending revenue was down 38% year on year. largely driven by lower net interest income from tighter loan spreads and lower production revenue,” Jeremy Barnum, CFO of JP Morgan Chase & Co., told analysts on Friday.
Wells Fargo reported $863 million in revenue from its home lending business in Q1 2023. That’s up 10% from $786 million in the fourth quarter, but down 42% from $1.49 billion in Q1 2022.
“Our home lending revenue declined 42% from a year ago, driven by lower mortgage originations including a significant decline from the correspondence channel and lower revenue from the resecuritization of loans purchased from securitization pools,” Charlie Scharf, CEO and president of Wells Fargo, told analysts.
The bank, which reduced headcount in the first quarter, expects staffing levels to continue to decline due to the strategic changes announced in January, Scharf added.
Wells Fargo’s mortgage banking noninterest income came in at $232 million in Q1 2023, a jump from $79 million in the previous quarter and a decline from $693 million in the same period of 2022.
With the drop in originations, Wells Fargo’s mortgage servicing rights (MSR) – carrying value (period-end) – decreased by 5%, falling to $8.82 billion in Q1 2023 from the previous quarter’s $9.3 billion. Compared with Q1 2022, MSR value rose by 5% from $8.5 billion. The net servicing income declined 11% quarter over quarter to $84 million and was down 28% year over year.
JP Morgan’s mortgage servicing rights also dropped to $7.7 billion in Q1 2023 from $8 billion in Q4 2022 — but were up from $7.3 billion in Q1 2022. The net mortgage servicing revenues rose to $148 million in Q1 2023, up from $47 million in Q4 2022 but down from $245 million in Q1 2022.
Overall bumper profits for both banks
Overall, Wells Fargo and JP Morgan reported bumper profits in the first quarter amid the failures of smaller banks.
The banks’ earnings were lifted by higher interest rates and reflected consumer perceptions that larger institutions are more stable after the recent collapse of Silicon Valley Bank and Signature Bank.
Wells Fargo’s profit rose 58% to $5 billion quarter over quarter and jumped 32% from a year ago.
Rising interest rates bolstered Wells Fargo’s earnings as loan portfolio grew — led by gains in personal lending and higher credit card balances.
JP Morgan saw profit rise 15% to $12.6 billion quarter over quarter. The country’s largest bank reported an increased profit of 52% compared to a year ago.
The bank saw a 2% increase in total deposits, climbing to $2.38 trillion in the first quarter. That’s a 7% decrease from $2.56 trillion from a year ago.
“We had a rough spell in March, but things are looking better now,” Barnum said.
“The banking situation is distinct from 2008 as it has involved far fewer financial players and fewer issues that need to be resolved. But financial conditions will likely tighten as lenders become more conservative, and we do not know if this will slow consumer spending,” Jamie Dimon, chairman and CEO, said in a statement.
“We are going to eventually have a recession, but that may be pushed off a bit,” he said.