Some are worried that higher rates may slow the housing recovery, depress home prices, and ultimately threaten bank earnings as mortgage volumes slump. Let’s assess just how important mortgages are to the two largest mortgage originators.
Wells Fargo & Co (NYSE:WFC)
The favorite bank of Berkshire’s Warren Buffett, Wells Fargo & Co (NYSE:WFC) reported impressive earnings in the most recent quarter. The company continued on a trend of mortgage origination profits, though many worry that the trend may soon come to an end.
Wells Fargo & Co (NYSE:WFC) tends to suffer from an identity crisis. It used its strong position in the financial crisis to steal Wachovia at bargain bin prices, becoming the largest mortgage banker in the world. Some 50% of Wells Fargo & Co (NYSE:WFC)’s income comes from noninterest income – income earned from fees and origination, not long-term lending. Of that 50%, 22% came from mortgage origination, brokering, and related fees.
So just how much did Wells Fargo & Co (NYSE:WFC) earn from mortgage origination?
Wells Fargo & Co (NYSE:WFC) recorded $2.21 billion in gains on the sale of new mortgages originated. If we assume that its costs of production are in-line with other competitors like JPMorgan Chase & Co. (NYSE:JPM), which reports the cost of new mortgages issued, pre-tax profits come in at $568.49 million for new mortgages.
Thus, of earnings of $5.2 billion, mortgage origination represents only about 6% of bottom line net income to the firm. Its substantial community banking divisions, which earn interest and noninterest income on everything from savings account fees to car loans, provide the firm of with two-thirds of its profits. Mortgage origination is merely a drop in the bucket.
JPMorgan Chase & Co. (NYSE:JPM)
The second-largest mortgage banker reported strong earnings this quarter. Excluding the impact of a reversal from a loan loss provision, the company earned $5 billion in its most recent quarter.
Despite the fact it is the second-largest mortgage originator in the country its earnings are hardly tied to the origination and sale of new mortgages. JPMorgan Chase & Co. (NYSE:JPM) earned only $566 million in pre-tax income from mortgage production and sale, making mortgages a meaningful 6% of quarterly profits, but hardly tying the bank to the changes in the mortgage market.
Investment banking and community banking are significantly more substantial to bottom line income. The company earned $2.84 billion from its investment banking operation. Consumer and community banking, its bread and butter Chase banking division, delivered a whopping $3.09 billion profit on the back of credit cards and savings accounts. Mortgage banking results are included in its community banking totals. All-in, mortgage banking makes up a fraction of its total community banking haul.
Why it matters
Over time, a company’s position in its market becomes much too familiar with its investors. It is only natural that investors would watch Wells Fargo & Co (NYSE:WFC) and JPMorgan Chase & Co. (NYSE:JPM) as bellwethers for the mortgage market, as they control 28% and 12% of the mortgage market, respectively.
However, investors should not make the mistake of watching mortgages volumes to determine profits for JPMorgan Chase & Co. (NYSE:JPM) or Wells Fargo. These banks are highly diversified, highly-profitable operations. Whether or not either bank reports a gain or loss is unlikely to have to do with the volume of new home loans.
Bottom-line income for both firms is much more levered to the loans they hold, not the loans they originate to sell.
The article How Much Do Mortgage Volumes Matter? originally appeared on Fool.com and is written by Jordan Wathen.
Jordan Wathen has no position in any stocks mentioned. The Motley Fool recommends Wells Fargo. The Motley Fool owns shares of JPMorgan Chase & Co (NYSE:JPM). and Wells Fargo. Jordan is a member of The Motley Fool Blog Network — entries represent the personal opinion of the blogger and are not formally edited.
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