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Improving Mortgage Origination Activity Likely To Extend Into Q4

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The U.S. mortgage industry saw an improvement in the volume of total originations for a second consecutive quarter in Q3, with data compiled by the Mortgage Bankers Association estimating that $300 billion in mortgages were originated over the period. While this figure is only slightly higher than the $297 billion in originations for the previous quarter, it is being interpreted by investors as a sign of overall improvement in the industry which has seen a drastic reduction in activity since late 2012.

This comes as a relief to the country’s biggest banks, most of which have seen a sharp decline in mortgage revenues over recent years. While the impact on banks such as Bank of America and Citigroup, which were forced to slash their mortgage operations in the wake of the recession, has been negligible, those such as Wells Fargo and U.S. Bancorp - which bulked up their mortgage banking businesses considerably after the economic downturn - have been hit the most. The steady increase in the number of mortgage applications over the last two quarters, coupled with the growing demand for refinancing options in October due to falling mortgage rates point to a strong quarter for the industry in Q4 2014.

In this article, we highlight the changes in mortgage origination volumes for each of the country’s five largest commercial banks over the last two years and also what to expect from each of them over the coming years.

See the full Trefis analysis for Wells Fargo | JPMorgan | U.S. Bancorp | Bank of America| Citigroup

The mortgage industry has been extremely volatile since early 2005 – with a boom over 2005-2007 being followed by the crash that contributed to the economic downturn. As the economy recovered from the recession, record-low interest rates and government-led incentives gave a boost to the industry in 2011-2012, when homeowners rushed to get their mortgages refinanced to benefit from the improved interest environment and lending terms. Refinancing activity dried up soon, though, and without much improvement in the demand for fresh mortgages, Q1 2014 saw the lowest mortgage origination volumes since Q3 1997. Data compiled by the Mortgage Bankers Association shows that U.S. mortgage origination volumes jumped from a low of $246 billion in Q1 2011 to $597 billion in Q4 2012 before diving to $247 billion in Q1 2014. A notable increase in fresh mortgage originations ($185 billion in Q3 2014 compared to $124 billion in Q1 2014) helped total originations climb to $300 billion by Q3 2014.

The table below summarizes the volume of mortgages originated by each of the country’s five biggest banks in each of the last ten quarters. The data has been compiled using figures reported by individual banks as a part of their quarterly announcements. Total market figures are taken from MBA’s historical mortgage origination data. It should be noted that all the banks include refinanced mortgages in addition to fresh mortgages as a part of their total origination figure for a period.

(in $ billions) Q1’12 Q2’12 Q3’12 Q4’12 Q1’13 Q2’13 Q3’13 Q4’13 Q1’14 Q2’14 Q3’14
Wells Fargo 129.0 131.0 139.0 125.0 109.0 112.0 80.0 50.0 36.0 47.0 48.0
JPMorgan 38.4 43.9 47.3 51.2 52.7 49.0 40.5 23.3 17.0 16.8 21.2
Bank of America 16.0 18.9 21.2 22.5 25.0 26.8 24.4 13.5 10.8 13.7 14.9
U.S. Bancorp 19.2 21.7 21.5 22.1 21.7 17.8 15.2 8.6 6.2 8.0 10.4
Citigroup 14.3 12.9 14.5 16.8 18.0 17.2 14.5 8.3 5.2 6.2 7.1
Top 5 Total 216.9 228.4 243.6 237.6 226.4 222.8 174.6 103.7 75.3 91.7 101.7
Total Market 436.0 461.0 550.0 597.0 477.0 572.0 469.0 326.0 247.0 297.0 300.0

The data shows that Wells Fargo is the undisputed leader when it comes to mortgage originations, with the bank having originated more home loans than its four closest competitors combined in seven of the last 12 quarters. In fact, comparing these figures with the total market size data compiled by the Mortgage Bankers Association shows that in early 2012 Wells Fargo was responsible for originating one in every three mortgages in the U.S. Its market share has shrunk over the years, though, settling below 15% for Q1 2014. The figure improved to 16% by Q3 2014.

Notably, the market share of these five banks put together has fallen considerably since mid-2012 – shrinking from 53% in Q2 2012 to just above 30% in Q1 2014. This indicates that they gained in 2011-2012 primarily because people with existing mortgages refinanced their loans under the government’s HAMP initiative with large banks instead of smaller lenders or credit unions. Refinances were responsible for nearly three-fourths of all mortgages originated between Q4 2011 and Q1 2013.

With a mortgage banking division that remained largely unchanged even after the recession, JPMorgan comes in at a rather distant second with a market share of slightly more than 7%. The bank has a strong presence in the industry, though, and has leveraged its country-wide branch network to maintain its market share over the years and we expect it to continue to do so in the future. With its revamped business model, Bank of America has now consolidated its position at the third position in this list with a market share just shy of 5%. The diversified banking group had to slash it’s mortgage business considerably after the downturn and gave away its position as the country’s top mortgage originator in the process. But we expect strong growth in origination volumes from Bank of America over coming years.

As for the country’s largest regional bank, U.S. Bancorp, things have slowed down to a larger extent than its peers because of its focus on specific geographies. However, Citigroup’s reluctance to boost its presence in the mortgage industry after being badly impacted by these operations during the downturn is likely to ensure that U.S. Bancorp remains entrenched at the #4 position for several more quarters.

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