Plummeting Mortgage Originations at Wells Fargo Don't Mean What You Think

On Tuesday, Wells Fargo acknowledged that its mortgage business fell further than at competitors like JPMorgan Chase and Bank of America. While this sounds bad, there's a critical reason it isn't as ominous as you might initially assume.

Jan 18, 2014 at 9:00AM


If you've ever doubted the importance of interest rates to the underlying economy, then allow me to disabuse you of that notion.

Earlier this week, Wells Fargo (NYSE:WFC), which is far and away the nation's largest mortgage lender, acknowledged that rising interest rates drove its mortgage underwriting volume down by a staggering 60% in the final three months of 2013, compared to the year-ago period.

As chief financial officer Timothy Sloan noted on the company's earnings call, "we've experienced the biggest impact [...] from an interest rate sensitivity standpoint when you think about the impact [it] had in the third and fourth quarter from the rate rise and the impact on the mortgage business."

Adding insult to injury, the downward trend at Wells Fargo was sharper than at other too-big-to-fail banks like JPMorgan Chase (NYSE:JPM) and Bank of America (NYSE:BAC). Compared to the same period in 2012, JPMorgan Chase's mortgage volume fell by 54% while Bank of America's declined by 40%.


The consolation prize, of course, is that Wells Fargo has nevertheless become the nation's most profitable lender. Thanks to soaring legal costs at JPMorgan Chase, the nation's largest bank by assets ceded its position on Tuesday as the U.S. bank with the highest annual profit to the California-based Wells Fargo.

For the 2013 fiscal year, JPMorgan Chase earned $17.9 billion, a 16% drop from 2012, compared to Wells Fargo's $21.8 billion, a 16% year-over-year rise.

In light of this, you'd be excused for wondering exactly why Wells Fargo performed so poorly in its primary wheelhouse -- that is, home lending -- and particularly when it was up against a ne'er-do-well like Bank of America, which retreated almost entirely from the mortgage market in the wake of the financial crisis.

The answer to this question is twofold. In the first case, the relative magnitude of the decline was a reflection of Wells Fargo's prevailing dominance in the market for home loans more than anything else -- prior to the most recent quarter, it underwrote roughly a third of all mortgages in America.

As Sloan explained on Tuesday:

We've talked, on a number of occasions, about how our market share over the last couple of years was disproportionately high, primarily because the biggest driver for origination volume until the last couple of quarters was refinances.

And the reason for that, again to remind everybody, is that we're the largest servicer and the quality of our servicing book was the highest in the industry, so we had many more opportunities than most to be able to meet the needs of our customers by refinancing [existing customers' mortgages].

So it's not surprising -- and [it's] something that we had been indicating was going to occur as the percentage of refinance volume declined, absolute dollars as well as the percentage of the total decline -- that our market share would go down.

In other words, because Wells Fargo was the biggest player in the space, it had the most to lose with the change in interest rates.

As a corollary, moreover, because both JPMorgan Chase and particularly Bank of America have considerably smaller presences in the mortgage market, it isn't surprising that their falls weren't as dramatic -- though, to be fair, they too took significant hits in this regard.

What this means going forward?
With no intent to be flippant, I'd argue that it means nothing -- that is, at least as far as Wells Fargo's current and prospective shareholders are concerned.

As our top analysts discuss in this invaluable free report, Wells Fargo is far and away one of the best banks in the country. It's exceptionally profitable, equally prudent in terms of risk management, and it's made shareholders a fortune over the past few decades. This is why it's referred to as the "only big bank built to last."

Consequently, if you're interested in learning more about why Wells Fargo should be a core holding in any bank investor's portfolio, simply click here now to instantly download this widely popular free report.

John Maxfield owns shares of Bank of America. The Motley Fool recommends Bank of America and Wells Fargo. The Motley Fool owns shares of Bank of America, JPMorgan Chase, and Wells Fargo. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

4 in 5 Americans Are Ignoring Buffett's Warning

Don't be one of them.

Jun 12, 2015 at 5:01PM

Admitting fear is difficult.

So you can imagine how shocked I was to find out Warren Buffett recently told a select number of investors about the cutting-edge technology that's keeping him awake at night.

This past May, The Motley Fool sent 8 of its best stock analysts to Omaha, Nebraska to attend the Berkshire Hathaway annual shareholder meeting. CEO Warren Buffett and Vice Chairman Charlie Munger fielded questions for nearly 6 hours.
The catch was: Attendees weren't allowed to record any of it. No audio. No video. 

Our team of analysts wrote down every single word Buffett and Munger uttered. Over 16,000 words. But only two words stood out to me as I read the detailed transcript of the event: "Real threat."

That's how Buffett responded when asked about this emerging market that is already expected to be worth more than $2 trillion in the U.S. alone. Google has already put some of its best engineers behind the technology powering this trend. 

The amazing thing is, while Buffett may be nervous, the rest of us can invest in this new industry BEFORE the old money realizes what hit them.

KPMG advises we're "on the cusp of revolutionary change" coming much "sooner than you think."

Even one legendary MIT professor had to recant his position that the technology was "beyond the capability of computer science." (He recently confessed to The Wall Street Journal that he's now a believer and amazed "how quickly this technology caught on.")

Yet according to one J.D. Power and Associates survey, only 1 in 5 Americans are even interested in this technology, much less ready to invest in it. Needless to say, you haven't missed your window of opportunity. 

Think about how many amazing technologies you've watched soar to new heights while you kick yourself thinking, "I knew about that technology before everyone was talking about it, but I just sat on my hands." 

Don't let that happen again. This time, it should be your family telling you, "I can't believe you knew about and invested in that technology so early on."

That's why I hope you take just a few minutes to access the exclusive research our team of analysts has put together on this industry and the one stock positioned to capitalize on this major shift.

Click here to learn about this incredible technology before Buffett stops being scared and starts buying!

David Hanson owns shares of Berkshire Hathaway and American Express. The Motley Fool recommends and owns shares of Berkshire Hathaway, Google, and Coca-Cola.We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

©1995-2014 The Motley Fool. All rights reserved. | Privacy/Legal Information