1 Megabank Whose Results May Surprise You

Banks everywhere anticipated to see a drop-off in mortgage originations as rates ballooned in the summer and refinancing volume fell -- yet one of them actually saw its originations remain flat over the last year. Unfortunately, this couldn't bolster its earnings.

When a bank makes a mortgage to a customer, it will usually either be for the purchase of a house or refinancing an existing mortgage to take advantage of lower rates. Refinancing volume has been a huge benefit to banks lately, but as rates have risen dramatically in the last few months, as shown in the chart below, many are expecting (and seeing) refinancing volume plummet:

Source: St. Louis Federal Reserve.

The Mortgage Bankers Association collects and projects the total quarterly refinancing volume, and you can see how dramatically things are expected to change when the data for the third quarter of this year comes in:

Source: Mortgage Bankers Association.

It should, of course, come as no surprise that the two large banks that reported last week -- JPMorgan Chase and Wells Fargo (WFC -0.24%) -- each saw their mortgage origination volumes decline dramatically when comparing each to both the most recent quarter and the same quarter last year:

Source: Company Earnings Reports.

So when Citigroup (C 2.56%) announced its earnings today, many investors likely saw its statement that its Global Consumer Banking Business revenue "declined 7% from the prior year period, as significantly lower U.S. mortgage refinancing activity and continued spread compression globally more than offset the ongoing volume growth in most international businesses," and didn't think anything of it.

Yet a quick scan of the Supplemental Earnings release reveals something surprising...

Mortgage origination wasn't actually down over the last year
Citigroup notes specifically its mortgage originations -- and there we see:

Source: Company Earnings Reports.

When Citi highlighted the difficulties in its North America consumer banking segment in its earnings presentation, it noted that one of the reasons revenue fell by $630 million (12%) over the last year was because of "lower mortgage origination revenues." The key there is to notice that although the dollar value of its originations were flat (which is a good thing in this environment), the revenue Citi was able to generate on those originations fell.

While there is no discussion as to refinance versus purchase originations, and which is more profitable, many banks have been hurt by higher fees charged by Fannie Mae and Freddie Mac to guarantee loans. In addition, as competition for the declining volume of mortgages increased, the profitability of those mortgages to banks likely fell universally.

Perhaps further insight into this will be had when Citi files its 10-Q in the next few weeks -- but as it currently stands, we see it wasn't that originations fell, but it instead that the revenue and profitability of those originations really took a hit.