The Fed’s rate cut brings more mortgage business to JPMorgan and Wells Fargo. But is it sustainable?
JPMorgan Chase And Wells Fargo are starting to feel the effects Federal Reserve‘s 50 basis point interest rate cut in September on their mortgage business. On Friday, both banks reported an increase in home loans during the third quarter of 2024 compared to the previous quarter.
Despite this push, executives remain cautious. They warned analysts about uncertainties that could affect the market in the future. These include geopolitical tensions, the macroeconomic landscape and upcoming regulatory changes – most notably the Basel III Endgame Rules.
The banks’ results mark the start of the quarterly earnings season for mortgages. They provide an early indication of what we can expect from independent building societies (IMBs), which will publish their own performance statistics in the coming weeks.
JPMorgan, a leader in depository banking, reported mortgage volume of $11.4 billion from July to September, up 7% quarter-over-quarter and 4% year-over-year.
Despite these gains, the bank’s retail channel volume fell to $6.5 billion, down 6% from the previous quarter and down 4% year-over-year. Meanwhile, the correspondent lending channel grew dramatically, reaching $4.9 billion, up 29% from Q2 2024 and up 17% from Q3 2023.
JPMorgan Chairman and CEO Jamie Dimon told analysts that rates fell in the third quarter, “so it makes sense for people to take advantage of that today,” but “those circumstances may not hold.”
The bank’s chief financial officer, Jeremy Barnum, added that Chase “for example, saw an increase in mortgage applications,” including refinancing activity.
“There may be some indications of more activity there, but this one [rate] Cuts were very expensive, right? The curve has been inverted for a long time, so this is largely expected,” Barnum said.
Wells Fargo, meanwhile, reported $5.5 billion in mortgage production in the third quarter of 2024, up 4% quarter-over-quarter but down 14% year-over-year. While the bank continues to prioritize purchase loans, refinancings increased due to lower interest rates, accounting for 20% of new loans, compared to 13% in the previous quarter.
Wells Fargo Chief Financial Officer Michael Santomassimo noted that “people are still very cautious about borrowing” due to the uncertainties associated with the election and the macro landscape. To him, the Fed’s 50 basis point cut was “helpful,” but borrowers expect rates to fall “more meaningfully.”
Analysts at Keefe, Bruyette and Woods said banks’ volumes were broadly in line with industry expectations. But profit-on-sales margins disappointed. These fell by 12 basis points at JPMorgan, “likely due to higher correspondent mix,” and by 45 basis points at Wells Fargo, which was “likely impacted by one-off items.”
Maintenance books
Lower interest rates are a double-edged sword for banks as they reduce the value of mortgage servicing rights (MSRs) due to increased loan prepayments. Still, some banks have built up their servicing portfolios and positioned themselves to offer refinancing as interest rates continue to fall and competition in the sector increases.
In this context, JPMorgan saw a lower book value of its services portfolio at the end of the third quarter. MSRs decreased to $8.75 billion, compared to $8.8 billion in the second quarter of 2024 and $9.1 billion in the third quarter of 2023. The bank had $236 million in net mortgage servicing income in the third quarter of 2024 , an increase of 13% from the previous quarter, but a decrease of 6% from the same period. last year.
Meanwhile, Wells Fargo’s MSRs fell 7% quarter-over-quarter and 23% year-over-year to $6.5 billion in the third quarter of 2024. Net service income rose 28% quarter-over-year quarter and up 178% year over year to $114 million.
In terms of home loan revenue, JPMorgan generated $1.29 billion in the third quarter of 2024, down 2% from the previous quarter but up 3% from a year ago. Wells Fargo’s home loan revenues totaled $842 million, up 2% from the second quarter of 2024, largely due to higher servicing revenues. Non-interest mortgage income also rose to $280 million from July through September, up from $243 million in the previous quarter.
Overall, Wells Fargo reported net income of $5.1 billion in the third quarter. CEO Charlie Scharf noted that the earnings profile is “very different than five years ago as we have made strategic investments in many of our businesses and emphasized other businesses.”
“Our revenue sources are more diverse and fee-based revenues increased 16% in the first nine months of the year, largely offsetting the net interest income headwind.”
JPMorgan, on the other hand, posted a profit of $12.9 billion in the third quarter. Dimon acknowledged growing geopolitical concerns and macroeconomic challenges, pointing to “large budget deficits, infrastructure needs, trade restructuring and remilitarization” as outstanding issues.
Looking ahead, both banks face regulatory uncertainty, especially with Basel III reforms underway.
“Rules can be written that promote a strong financial system without causing unnecessary impacts on the economy, and now is an excellent time to take a step back and review the extensive set of existing rules – which are in place for good reason introduced – to review to understand their rules. impact on economic growth, the viability of both public and private markets, and secondary market liquidity,” Dimon said.
