The broad indexes ended mixed, ahead of Thursday's European Central Bank (ECB) policy meeting, with Bloomberg reporting that ECB President Mario Draghi will propose "unlimited purchases" of government bonds, while refraining from "setting a public cap on yields," according to unnamed sources.
The KBW Bank Index (I:BKX) pulled back slightly to close at 47.13, with 14 of the 24 index components showing declines for the session.
Looking ahead to the next earnings season for the financial services industry, Credit Suisse analyst Moshe Orenbuch on Wednesday said he expected that "mortgage banking revenue will continue to be solid in 3Q, benefiting from a higher than average gain on sale margins and continued strong origination activity," leading his firm to increase its "mortgage forecasts for our banks under coverage to up 9% q/q in 3Q (from previous estimates of down 15% q/q)."The Mortgage Bankers Association estimates that total third-quarter originations will total $$371 million, which is roughly flat from the second quarter. Most newly originated mortgages are quickly sold to Fannie Mae (FNMA) or Freddie Mac (FMCC), and Orenbuch estimates that the average gain-on-sale margin for lenders "be 3.24%, on average, based on the spreads between primary and secondary rates versus 3.08% in 2Q'12." The analyst said that "third-quarter spreads are expected to be well in excess of the 9-qtr average of 2.05% given reduced industry capacity and the elevated profitability of the HARP 2.0 program-which should support healthy production revenues this quarter." HARP is the Home Affordable Refinance Program, which President Obama expanded early this year, to allow qualified borrowers with mortgages held by Fannie of Freddie to refinance their entire loan balance, at today's low rates, no matter how far "underwater" the underlying property might be, following the collapse of housing values. Under HARP 2.0, there is no loan-to-value ratio limit, where a lender originating a traditional first-lien mortgage loan would typically require the borrower to obtain costly private mortgage insurance, to protect the lender, if the loan is for more than 80% of the underlying home's market value.