Not only do such loans carry more fees than mortgage refinances, a likely move by the Federal Reserve to raise rates means the banks can make more money on interest, too.
Wells Fargo and its rivals like Bank of America (BAC) and JPMorgan Chase (JPM) have a network of mortgage professionals and branches that are attractive to customers seeking to take out a new home loan, also known as a "purchase mortgage." Their online competitors -- exchanges such as LendingTree (TREE), which collects fees by matching customers with smaller lenders -- will face challenges since they cater more to borrowers searching for low rates and refinancings; the latter will flag as interest rates continue to rise.
Privately owned housing starts in April rose 9% from last year to above 1.1 million, more than 20% higher than in March and 33% higher than two years ago, according to a U.S. Census report released on Tuesday. More new homes and higher rates are vital ingredients in the recipe for profit for firms like Wells Fargo, which booked more than $1.5 billion in mortgage banking income in the first quarter, a 7% share of its operating revenue, according to the company's Securities and Exchange Commission filing.
Industrywide, mortgage originations grew 17% year over year, to $288 billion, in the first quarter, according to the Mortgage Bankers Association, which increased its outlook for mortgage origination volume for the year to $1.2 trillion. That's an 11% increase from 2015, according to a Portales Partners report in May that cited the mortgage group.
"So 2015 is shaping up to be a good year for the mortgage originators," the report said. "Additionally, we think the large mortgage servicers will see significant write-ups in their mortgage servicing rights over the next two years, given an outlook for higher long-term rates and relatively low mortgage servicing-rights values for the industry."
Indeed, TheStreet's Jim Cramer says a housing comeback is only beginning and that bank stocks are one way for investors to take advantage of that. His charitable trust, Action Alerts Portfolio, holds Wells Fargo stock and says it's underpriced, at just 14 times earnings.
The mortgage business at Wells Fargo, by far the largest banking originator in the U.S., "tends to move in the opposite direction of our net interest income," the San Francisco-based company said in its first-quarter filing with the SEC. "In response to higher interest rates, mortgage activity, primarily refinancing activity, generally declines. And in response to lower rates, mortgage activity generally increases."