Wells Fargo Sees Mortgage Market Stabilizing in 2014
Wells Fargo & Co.’s Chief Financial Officer Timothy Sloan said Wednesday that he expects the U.S. mortgage market to stabilize next year.
A decline in refinancing volumes, spurred by a sudden rise in long-term interest rates in June, led to lower mortgage banking income across the industry. San Francisco-based Wells Fargo saw its third quarter mortgage banking income drop to $1.6 billion, down 43% from a year earlier.
Wall Street Journal / Shayndi Raice / Nov. 13, 2013
“The good news for those who want a stabilizing mortgage market is I think that’s where we are probably moving,” Mr. Sloan said at a Bank of America Merrill Lynch investor conference in New York. “We will probably have a stabilized mortgage market next year.”
Still, Mr. Sloan said he expects mortgage originations to continue to decline.
A refinancing wave had beefed up banks’ profits during the first half of 2013. Mr. Sloan said the market is now shifting away from refinancing to home purchases, which he said is strong.
“We’re running through this last level of refinancing activity so the market is starting to stabilize and becoming more of a purchase market,” he said. “The industry is much more focused on the overall purchase market and the purchase market is good.”
Mr. Sloan said he also sees stabilization on the gain-on-sale margin, which is the revenue the bank books divided by the value of mortgages it originates. Margins had been unusually high the last few years as the U.S. housing bust caused many players to exit the mortgage industry. In more recent quarters, margins have crept back up.
“We think there’s been a fundamental shift,” Mr. Sloan said. “There’s a lot more regulation, there are fewer competitors and the competitors are a lot more rational. We really believe this cycle will be a little bit different and it’s likely that margins will stabilize as opposed to go down to much lower levels.”
The sudden decline has caused banks like Wells Fargo to slash jobs in their mortgage units. Wells Fargo cut 6,200 jobs since the refinancing slump began in the summer. But those expense cuts still have not come through in earnings as the bank continues to spend on severance pay. Mr. Sloan said he thinks the expense reduction efforts will start to show up in the fourth quarter.
Low short-term interest rates will continue to pressure the bank’s net interest margin, which is a key measure of lending profitability. Mr. Sloan said he isn’t concerned with pressure on those margins, since a contributing factor to margin decline is a rise in deposits, which he believes positions the company well for the future.
Improved credit quality has benefited banks across the industry in recent quarters. Mr. Sloan said he expects that trend to continue. The bank will likely continue to release money it had previously set aside to cover the cost of bad loans, he said.
He also said the fourth-largest U.S. bank by assets remains committed to dividend and share buybacks. Big banks like Wells Fargo this month received information about their annual stress tests from the Federal Reserve. The banks will have the opportunity to ask the Fed for a dividend increase or share buybacks in the beginning of 2014.
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