NEW YORK ( TheStreet) - Mortgage lending is expected to decline this year as the refinancing wave subsides, but Fifth Third Bancorp (FITB - Get Report) has plenty of offsets to preserve earnings, according to UBS analyst Stephen Scinicariello.
Fifth Third Bancorp of Cincinnati originated $25.2 billion in residential mortgage loans during 2012, increasing from $18.6 billion in 2011. The company's revenue from mortgage origination fees and the sale of loans totaled $821 million in 2012, more than doubling from $396 million the previous year.
The company also booked $250 million in loan servicing fees last year, however this was mostly offset by $186 million in servicing rights amortization and $40 million in valuation adjustments on servicing rights. These adjustments are typical during a period of heavy refinancing activity, because banks must reflect the anticipated decline in servicing revenue from the loan payoffs, in their earnings and on their balance sheets.
A Major Decline for 2013
Mortgage volume was given a great boost last year after President Obama expanded the Home Affordable Refinance Program (Harp). HARP 2.0 allows qualified borrowers with mortgage loans held by government-sponsored enterprises -- including Fannie Mae and Freddie Mac -- to refinance their loans at today's historically low interest rates, no matter how much the value of the collateral home as dropped.
Mortgage lenders in 2012 also enjoyed very wide gain-on-sale spreads, which are expected to drop significantly in 2013, in part because the rising yield on 10-year U.S. Treasury bonds is causing a corresponding increase in mortgage-backed securities yields. Scinicariello late on Thursday said in a report that mortgage gain-on-sale spreads had declined by 30 basis points since the end of last year.The Mortgage Bankers Association expects total mortgage loan originations in the United States to decline by 20% in 2013 to $1.396 trillion from $1.750 trillion in 2012. The MBA expects mortgage volume to decline by another 24% in 2014, to $1.055 trillion.
What This Might Mean for Fifth Third
Fifth Third's $845 million in mortgage banking net revenue made up 13% of the company's total revenue during 2012, increasing from 10% in 2011. In light of the MBA forecasts and the declining mortgage gain-on-sale spreads, UBS conducted "a scenario analysis to assess the EPS effect of a 50% decline in mortgage origination revenues; taking into account several revenue and expense offsets."