It’s not all about refis
Higher rates may be depressing refinance activity, but as my colleague John Maxfield pointed out, it may not be as dire for the market for home purchase loans. In general, purchase activity has been depressed in comparison with refinance activity, and a resurgent housing market and improving economy could help it recover and pick up some of the slack from the drop in refis.
Market share gains
The increased reliance on mortgage-banking activity noted above isn’t solely a result of the booming refi market. All three of the banks have expanded their mortgage-market share. In 2006, Countrywide, Wachovia, and Washington Mutual were all among the leaders in U.S. mortgage origination. Those three were acquired by Bank of America Corp (NYSE:BAC), Wells Fargo & Co (NYSE:WFC), and JPMorgan, respectively. Between those acquisitions, other lenders running into trouble, and work by those three banks — Wells Fargo & Co (NYSE:WFC) and JPMorgan Chase & Co (NYSE:JPM) in particular — to increase their market share, these big banks are making more in mortgage banking because they simply control more of the market.
Worst-case scenario
We can, of course, also think in terms of worst-case scenarios. Consider JPMorgan Chase & Co (NYSE:JPM) in the middle of the pack, with roughly 10% of its revenue coming from mortgage banking. What if that all went away? For one, it would be only 10%, which smarts, but isn’t a dire dip. However, the banks are also closely managing the costs in their mortgage-banking arms, so they’re looking to slim down as demand wanes. So the hit to the banks’ profits may be more muted.
But here’s the catch. What applies to these three banks doesn’t necessarily apply to all banks. Consider smaller banks HomeStreet Inc (NASDAQ:HMST) and Waterstone Financial, Inc. (NASDAQ:WSBF). At HomeStreet Inc (NASDAQ:HMST), gains on mortgage loan origination and sales and servicing income accounted for a whopping 76% of revenue over the first six months of the year. At Waterstone Financial, Inc. (NASDAQ:WSBF), 70% of first-quarter revenue came from mortgage-banking activities. For all of the concerns over the complexity of bigger banks, when we look at numbers like these, it’s readily obvious why diversification of revenue streams is actually very beneficial.
In the end
Rates have risen. If you ask me, they’ll continue to rise. Maybe not as quickly as they did between the first and second quarter, but with the economy continuing to mend and the Federal Reserve inching closer to reducing its monetary support, more buoyant rates shouldn’t be terribly surprising. While there will be some definite pain points for all banks, it’s important to understand the banks you’re invested in well enough to know just how exposed they are to a downturn in mortgage banking.
The article The Threat From Higher Mortgage Rates: Truth vs. Fiction originally appeared on Fool.com and is written by Matt Koppenheffer.
Matt Koppenheffer owns shares of Bank of America and JPMorgan Chase. The Motley Fool recommends Bank of America and Wells Fargo and owns shares of Bank of America, JPMorgan Chase, and Wells Fargo.
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