(WFC - Get Report)
(JPM - Get Report)
Bank of America
(BAC - Get Report)
are the three biggest mortgage originators, although only Wells has really maintained and in fact grown its presence in the mortgage origination business.
Both Bank of America and JPMorgan have reduced their presence in this space. Bank of America's share of mortgage originations has declined from 25% in 2007 to 5% by the end of the fourth quarter of 2011.
Besides Wells Fargo, banks with an exposure to underwater states like Florida such as
(STI - Get Report)
Fifth Third Bancorp
(FITB - Get Report)
also stand to gain. Mortgage banking also accounts for a higher share of revenues at these three banks at 11%, 7% and 10% respectively compared to the industry average of 4%.
Not all of the revenue upside will flow to the bottomline, however. The analyst expects Wells Fargo to use the upside from mortgage revenues to accelerate its cost savings programs while SunTrust will likely channel the higher revenues towards meeting its higher mortgage repurchase claims.
Also, banks holding mortgage-backed securities will see a downside from lower yields on their balance sheet. But the analyst notes that "banks make more of the origination fees and lose less of the net interest income," given that they originate 70% of the mortgages but hold only 20% of agency-backed securities.
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Also while the rising Treasury yields could result in mortgage yields creeping higher, Nomura does not anticipate a significant dip in refinancing activity under HARP. "HARP provides a fairly interest rate insensitive stream of income to the banks. Most borrowers going through HARP have interest rates of 5-6% on their loans. They would certainly prefer a 3.75% mortgage, but they will happily take a 4%, 4.25% or even a 4.50% loan as well."
--Written by Shanthi Bharatwaj in New York
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