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October 12, 2012 8:10 pm
Congratulations, JPMorgan and Wells Fargo. You have successfully followed the first rule of post-crisis banking: when the Federal Reserve is spraying money around, get in the way. On Friday, JPMorgan reported that in its third quarter, mortgage production-related revenue rose 36 per cent versus a year ago, to a record $1.8bn. Wells’ quarterly numbers showed mortgage revenues hitting $2.8bn, up more than 50 per cent. The refinancing wave generating those numbers follows the Fed’s pledge to buy government-backed mortgage debt until the economy improves. Rates on 30-year mortgages have fallen to new lows, spurring a wave of refinancing.
But the same distorted market conditions that are stimulating mortgage volumes and fee income for banks are undercutting what banks can earn on deposits. Net interest margin at Wells, for instance, fell by 18 basis points to 3.84 per cent. Those margins are expected to remain under pressure.
To boost its interest income, Wells opted – for the first time in years – to hold nearly $10bn of mortgages it underwrote in the quarter, even though it could have sold them off to Fannie Mae, Freddie Mac or another governmental group. Selling mortgages to these entities results in a one-time shot to revenues, whereas keeping them brings a continuing stream of income. Wells preferred to hold the mortgages outright rather than buying government-guaranteed mortgage bonds, which carry a lower yield.
Wells says that the loans it is holding are high quality. In other words, the bank is confident that it is not overreaching for yield. Even if that is true, the question remains what happens to both Wells and JPMorgan when the refi spigot is turned off, as it eventually must be. That’s a question on investors’ minds as the shares of the two companies ticked down on Friday.
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