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.
Wells Fargo's margins lag the industry by a quarter because the company recognizes loan sales when they actually occur, rather than when the new mortgage loan has its rate "locked," as most other large banks do. According to Staite, Wells Fargo's decline in first-quarter mortgage revenue "was due to lower volumes with WFC seeing a fall in correspondent origination which could be due to more competitive pressure." "Beyond Q2 we expect mortgage revenues to further decline due to lower refinancing volume across the industry," Staite wrote. The analyst expects Wells Fargo's "underlying revenues to decline by about 3% in Q2," and estimates the company will earn $3.74 a share this year, with earnings declining slightly to $3.73 in 2014. Staite has a "neutral" rating on Wells Fargo's shares. Franklyn Codel, Wells Fargo's head of mortgage production, participated in an industry forum hosted by Citigroup earlier this week. According to a summary of the forum provided to clients by Citigroup analyst Keith Horowitz, Codel is confident that the nature of Wells Fargo's business model is ideal even during a time of declining demand.
Paraphrasing Codel, Horowitz wrote that "WFC has a natural offset in falling commission expense as the sales staff is 100% commission-based . . .
Interested in more on Wells Fargo? See TheStreet Ratings' report card for this stock. -- Written by Philip van Doorn in Jupiter, Fla. >Contact by Email. Follow @PhilipvanDoorn