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."
LendingTree falls prey to the same trend. Higher rates can hamper its ability to deliver new loans as borrowers grow less willing to use its exchange, according to the company's first-quarter financial report.
"Generally, increases in interest rates adversely affect the ability of our marketplace lenders to close loans, and adverse economic trends limit the ability of our marketplace lenders to offer home loans other than low-margin conforming loans," the filing said.
LendingTree has seen its shares skyrocket 250% over the past 12 months, largely because the low cost of borrowing has attracted users looking for cheaper loans. Now that rates are set to rise, borrowers may not be lining up to use the platform and the established U.S. banks could reclaim a greater share of the market, according to Jennifer A. Thompson, an equity analyst with Portales Partners. And while rates are fairly consistent among purchase mortgages and refinancings, new home loans tend to generate more fees for the big banks.
"Banks with deeper client relationships will be better positioned for purchase [mortgage] volumes," he said. "In a refi environment, people are just shopping for the best interest rates. The big full-service banks would have more of an edge in a purchase environment."