On Friday, the two most valuable banks in the country, Wells Fargo and JPMorgan Chase, both reported massive, strong earnings. JPMorgan reported (PDF) a $5.7 billion third-quarter profit while Wells Fargo came in with $4.9 billion in net income (PDF). And where did much of these profits come from? Not from high-flying trading or investment banking, but from a boring, stodgy business: lending money to homeowners.
The banks’ earnings reflect three very real trends: the subprime bust is receding into the past, exacting a smaller and smaller toll on banks’ balance sheets; the housing market is slowly healing; and the Federal Reserve is deliberately pushing down mortgage rates in order to spur more mortgage lending.
The economy as a whole benefits when home prices rise and owners are able to refinance—the lower mortgage payments means more money can be spent. But the biggest winners are those who are already doing OK: not just JPMorgan and Wells Fargo, but people who already own and have equity in their homes.
Wells Fargo made $2.8 billion in its mortgage business this quarter, with $2.6 billion of that coming from loan origination and sales. The bank originated $139 billion worth of mortgages, had $188 billion of mortgage applications, and held $9.8 billion (that’s all? Maybe it added $9.8 b to its holdings in the quarter) of conforming single family loans (read: not subprime) on its balance sheet this quarter. Some 72 percent of those applications were refinances. Originations were up 9 percent from the previous quarter. But more lending doesn’t mean the bank is taking on more risk. Of the $1.9 trillion in mortgages Wells Fargo services, 71 percent are guaranteed by government entities Fannie Mae, Freddie Mac, or Ginnie Mae. Only 7.1 percent of its mortgages in the second quarter were delinquent or in foreclosure, compared to nearly 13.5 percent for Bank of America and 10.4 percent for JPMorgan. All told, Wells Fargo’s income from mortgages was more than half of its net income for the quarter and more than double its mortgage income from the same point last year.
JPMorgan’s profits were not so dependent on home-lending, but the growth was still impressive. JPMorgan had $47 billion in originations, nearly a 30 percent increase from a year ago and a nine percent increase from last quarter, and earned $563 million in mortgages, up more than 50 percent from this same point last year. Dimon said that “about 75 percent” of the mortgage activity came from refinancing, comparable to Wells Fargo’s 72 percent.
Dimon declared today that housing “had turned a corner.” It’s true, and current homeowners and the big banks who lend to them are gaining the most from the housing comeback. But the gains aren’t evenly distributed.
Since the financial crisis, loan standards have tightened. Fannie and Freddie, who still guarantee an overwhelming portion of residential mortgages, have gotten pickier about what mortgages they’ll take on and more willing to force banks to buy back ones they determine don’t meet their standards. And that has led lenders to impose even tighter standards than the agencies. A survey conducted by the National of Association of Realtors found that 75 percent of loans in 2011 guaranteed by Fannie and Freddie went to to borrowers with FICO scores higher than 740, which is a high credit score. By comparison, in prior period 2001 to 2004, approximately 40 percent of Fannie and Freddie backed loans went to borrowers with exemplary credit.
All the while, the Federal Reserve has been deliberately pushing down mortgage rates, with both low interest rates and then specifically with the announcement they will purchase $40 billion worth of mortgage backed securities issued by Fannie and Freddie. In a recent speech in Indianapolis after the announcement of the bond buying program, Fed Chairman Ben Bernanke said that an explicit goal and expectation of the program was “to put further downward pressure on longer-term interest rates, including mortgage rates.”
Despite the tight standards and low rates, banks can still make money through home loans. But they are doing so largely by refinancing homeowners with some equity and high credit scores, rather than by making loans to first time buyers and to those with lower credit scores. Refinancing activity is picking up and and now constitutes 83 percent of all mortgage applications. And government housing programs are finally starting to help some deeply underwater homeowners.
Today’s results from the two biggest banks—the two megabanks who suffered the least damage from the mortgage meltdown— is in some ways a shining example of the success and failure of banking and housing policy since the 2007–2008 collapse. Thanks to extraordinary government support, the financial system is back on its feet, profitable, and lending again. Mortgage rates are low and mortgage origination is happening at a brisk clip. Homeowners are refinancing. But generally, these efforts have helped those most able to help themselves: big banks and homeowners with equity in their houses and good credit.
Things are getting better, but they don’t look all that different.