In March, Wells Fargo CFO Timothy Sloan previewed the bank’s first quarter earnings. Noting that Wells had originated $524 billion worth of mortgages in 2012, he expected, as the industry did, volumes and profitability to come down a bit in 2013. He also added, “We love the mortgage business.”
I don’t think he had the third quarter of 2013 in mind when he uttered that sentiment. Wells Fargo, more than any other Wall Street bank, is attached to the housing market. The company originates a third of all mortgages in the United States, so the slowdown over the taper summer was bound to have an impact.
Total loan applications received for Q3 added up to about $87 billion, down 53.7% from Q3 2012. Mortgage originations fell 42% to $80 billion. Wells CEO added that, “The fact that the housing market is getting better is good for the American public, it’s good for our customers and in the long term, it’s good for our business.” While it is possible this was just a throwaway statement for public consumption, it expresses the idea that the housing market is fully detached from the mortgage business as if demand for financing had no impact on demand for home sales and thus prices. While that may have been true in 2012 to a good extent, recent indications are looking like the housing market will be even more reliant on mortgage financing as institutions scale back or fully retreat.
At Citigroup, mortgage lending fell only 20% from the same quarter a year ago. Revenue in mortgage banking actually fell 76% Y/Y, but mortgages were never emphasized at Citi.
It seems that the mortgage slump is very real in terms of the taper effect on loan demand. The question becomes how long can this housing trend last without demand for mortgages. Pending mortgages at Wells Fargo heading into Q4 collapsed to $35 billion, down from $65 billion at the end of Q2. So, despite “taper off”, the mortgage boom may have been dealt a more lasting blow.
Trading revenues at both banks took hits, as expected. Wells Fargo trading revenue was down 25% to $397 million, but the bank was never a Wall Street titan in that sense. That result, however, seems to be very typical of what we are seeing out of Q3.
At Citigroup, bond trading fell a similar 26%, down to $2.8 billion. Total revenue at Citi was down about $650 million from Q3 2012, meaning the $950 million decline in fixed income trading accounted for all of the revenue drop and then some.
Citigroup did happily point out that it was diversifying away from the US domestic market, focusing on enlarging its presence among emerging markets. Revenues in Q3 were down 1.3% in Latin America and 7.1% in Asia. Given the World Bank warning earlier this month, perhaps that wasn’t the best idea.
So far, given these results I have to conclude that the mortgage channel for monetary “stimulus” has been taken out of the economic equation. With a huge slump in mortgages, mostly refis, there cannot be an interest-driven “wealth effect” for consumers (no houses-as-ATM’s). That limits the “positive” economic contribution from whatever price changes have occurred out of the 2012-13 mini-bubble. This is the only means of attaching monetary policy gains to a broad section of households and consumers. Absent the refi boom, as little as it has actually helped the economy, the consumer segment will be fully dependent on actual earned income, disability payments and student loans. That is not a great mix for a robust future. And it should diminish economic expectations going forward since so much of the marginal gains were expected from real estate-related activity, including refis.
Trading results have been far worse than originally suggested only a month ago. “Street” expectations were for 10% revenue hits, with only rumors of 20%+. Citigroup, as well as Jefferies, were worse than expected. JP Morgan only saw an 8% Y/Y decline, however that was somewhat misleading since Q3 2012 included losses on its synthetic credit portfolio of about $449 million. Adding that back, Y/Y revenue fell 17%+ in fixed income markets at JPM.
Like mortgages, the bond market selloff and rate volatility caught the banks by surprise, adding evidence to the idea that they were committed to, and, more importantly, positioned for, QE-forever. One phrase that is common to all these bank earnings reports is “challenging environment.” Before Q3, that term applied to self-congratulations, as mortgages and trading revenue (read: prop trading) made up for the “challenging environment.” If challenging environment is a euphemism for lackluster economy, what will take its place without “easy” money from mortgages and prop trading?
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