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Wells Fargo's Expense Cuts Can Offset Declining Mortgage Volume

Stocks in this article: BAC WFC FNMA FMCC

NEW YORK ( TheStreet) -- Wells Fargo (WFC) is facing a decline in mortgage loan demand and mortgage banking revenue, but the bank stands ready to quickly cut its expenses as volume declines.

Wells Fargo has emerged as a big winner from the financial crisis, becoming the nation's dominant mortgage lender, with a 27.7% share of newly originated loans during 2012. Much of Wells Fargo's mortgage growth has come at the expense of Bank of America (BAC), which greatly scaled back its loan origination activity in the wake of the financial crisis.

Bank of America's ill-timed acquisition of Countrywide Financial in 2008 has caused the bank to focus for years on working through mortgage repurchase claims from investors and other parties. Then again, the company may be ready to become a major competitor to Wells Fargo, now, following a major settlement with Fannie Mae (FNMA) in the first quarter, the ending of objections to its $8.5 billion proposed mortgage putback settlement with institutional investors in 2010 and with its groundbreaking settlement with MBIA (MBI) on Monday.

A decline in mortgage origination fee revenue and gains on the sale of new loans in the secondary market has been expected for the major mortgage lenders. The Mortgage Bankers Association estimates that one-to-four-family mortgage loan origination volume will decline to $1.478 trillion this year from $1.750 trillion during 2012. Refinancing volume was very high last year, because of the record-low mortgage rates, and because the expanded Home Affordable Refinance Program, or HARP 2.0., allowed qualified borrowers to refinance their entire balances, no matter how much the market value of the collateral home had declined.

The Mortgage Bankers Association expects total U.S. one-to-four-family mortgage loan origination volume to decline further in 2014, to $1.091 trillion.


Gains on the sale of mortgage loans -- usually to Fannie Mae and Freddie Mac (FMCC) -- have also been declining because of a rise in long-term market interest rates and because of the greater availability of mortgage credit as the banks and the economy strengthen.

Wells Fargo reported first-quarter mortgage banking income of $2.794 billion, declining from $3.068 billion in the fourth quarter and $2.870 billion during the first quarter of 2012. First-quarter mortgage loan originations declined to $109 billion from $125 billion the previous quarter. Net gains on mortgage loan origination and sales totaled $2.5 billion in the first quarter, declining from $2.8 billion in the fourth quarter and from $2.6 billion in the first quarter of 2012.

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