Banks elevated their mortgage market share within the first quarter, as early features present

The quarter-to-quarter increase in mortgage origins at eight banks exceeded industry-wide expectations, suggesting the segment is regaining market share, according to a report by Keefe, Bruyette & Woods.

The combined volume of the first quarter increased 3% from the fourth quarter and 21% compared to the first quarter of 2021 for the group of eight banks covered by KBW: Wells Fargo, JP Morgan Chase, US Bank, Bank of America, Truist, First Republic, Citi and PNC. That compares with a 13% decrease from the previous quarter recently forecast by both the Mortgage Bankers Association and Freddie Mac. The results even exceeded Fannie Mae's estimates for a 6% decline in the first quarter.

This implies that some banks like JPMorgan Chase are likely to regain market share and potentially outperform the industry for that period, said KBW analyst Bose George.

"However, large volumes were not enough to offset the decline in sales margins as production revenues declined for most banks," George wrote in the report. "We believe this is consistent with our view that we have reached a turning point."

Selling margin profit declined quarter over quarter for seven of the eight banks. The outlier was Wells Fargo, and the surge there was due to the bank's early buyouts on loans from Ginnie Mae's mortgage-backed pools of securities.

Financial results were largely determined by the origination channels that each bank highlighted, a report by Piper Sandler found.

"Banks with a higher proportion of origination that come from the retail channel or that emphasize the retail channel (Wells Fargo, PNC) tended to report stronger results, while corresponding banks (Truist, US Bank, Citizens) put more pressure on the mortgage banking business Last quarter results, "said Kevin Barker and R. Scott Siefers, managing directors at Piper Sandler.

Meanwhile, mortgage servicing rights ratings rose quarter to quarter by a higher percentage – 27% for the five banks that provided the information – than KBW's forecast 20%.

The valuation of service rights benefited from an 82 basis point increase in the 10-year treasury yield and the corresponding increase in 30-year mortgage rates by 50 basis points since the end of 2020.

"Also, MSR pricing is likely to improve as market risks (such as forbearance rates) have decreased," said George. "We see MSR strength as a positive read-through for service owners such as Mr. Cooper, New Residential, Two Harbors, PennyMac Financial Services, and PennyMac Mortgage Investment Trust."

Piper Sandler noted that Mr. Cooper has one of the largest unhedged MSR portfolios compared to the other publicly traded non-banks. The first quarter could see Mr. Cooper's MSR rating increase by $ 125 million, according to Piper Sandler's MS forecast.

Wells Fargo, which has the largest portfolio of MSRs in the industry, continued to decline from $ 857 billion at the end of the fourth quarter to $ 801 billion as of March 31.

This decline was due to Wells Fargo reducing the number of loans it buys on its correspondence channel.

"In the next year or two, several non-banks like Rocket Cos., PennyMac Financial Services, New Residential or Mr. Cooper could have a larger market share in the service sector than Wells Fargo," said Piper Sandler. "Though we should point out that Wells Fargo has started raising Corresponding Compliant Loans again and could see more volume over time."

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