Bank of America announced its corporate earnings and the results were similar to what we have seen from Wells Fargo, Citigroup and JP Morgan. Trading revenues took a hit on fixed income, but mortgage originations are way down.
Throughout the conglomerate, total originations were $22.6 billion in Q3, down 11% from Q2. Revenue from mortgages dropped from $2.4 billion in Q3 2012 all the way to $844 million. That was a 65% collapse that would have taken a nearly 30% chunk out of quarterly net income if the loan loss provision release wasn’t of similar magnitude.
However, the more worrisome result, like that of Wells Fargo, was the indication for future demand for real estate financing. The pipeline of new mortgages at the outset of Q4 was an astounding 60% below the end of Q3 2012. Given that each of the big banks has laid off workers in their mortgage divisions, it points to a lack of belief on their part for a quick turnaround. These banks’ collective action and Q3 results indicate an expectation for this growing mortgage finance “bear” to last awhile.
The data from the banks do, in fact, confirm the weekly data of mortgage applications from the Mortgage Bankers Association. While the index increased from last week, two in a row, it was mostly due to a slight uptick (+3.3%) in refi activity. Since the week of May 5, the far greater proportion of the collapse in mortgage applications had been in the refi segment. That directly endangers the consumer spending/monetary “stimulus” element of the economic recovery narrative, the theme of yesterday’s post on bank results.
Recently, however, it has been application activity for home purchases that has seen marginal changes. Purchase applications had held up fairly well until the end of June, but since then there has been a noticeable decrease in purchase applications. The purchase index for this past week fell nearly 5%, but some of that may (or may not, it’s not yet clear) be due to the government shutdown’s effect on processing GSE applications and such.
Compared to the same week in 2012, purchase applications are off 10% (refis are down 64% in comparison), meaning that current demand for mortgages is not matching last year’s uptick during the mini-bubble. That certainly fits with recent housing data showing a decline in real estate growth rates, so much that the housing activity portion of marginal economic growth might again reverse.
Again, the evidence from both mortgage applications and bank earnings is troubling for the larger macro picture, particularly the lack of volume “momentum” into Q4. That would suggest for as much as the decision to taper was at least delayed, the mortgage/housing market is acting as if taper had already taken place. Since monetary policy is all about psychology, it would appear as if markets are reacting to the mind games rather than the actual policy. If that were true, monetary credibility has become a real issue here. That could become an even larger problem as marginal real economy activity expected from a housing boost never arrives.
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