Fed rate cut brings more mortgage biz to JPMorgan, Wells Fargo. But is it sustainable?

Mortgage business has increased recently for Wells Fargo head Charlie Scharf, left, and JPMorgan Chase CEO Jamie Dimon, but will it last?

JPMorgan Chase and Wells Fargo are starting to feel the effects of the Federal Reserve’s 50-basis-point rate cut in September on their mortgage businesses. On Friday, both banks reported an uptick in home lending during the third quarter of 2024 compared to the previous quarter. 

Despite this boost, executives remain cautious. They warned analysts about uncertainties that could affect the market moving forward. These include geopolitical tensions, the macroeconomic landscape and upcoming changes in regulation — particularly the Basel III Endgame rules. 

The banks’ results mark the start of the quarterly mortgage earnings season. They provide an early indication of what to expect from independent mortgage banks (IMBs), which will release their own performance metrics in the coming weeks.

Leading the depositories, JPMorgan reported a mortgage volume of $11.4 billion from July to September, an increase of 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 4% lower year over year. Meanwhile, its correspondent lending channel surged, hitting $4.9 billion, up 29% from Q2 2024 and up 17% from Q3 2023. 

JPMorgan chairman and CEO Jamie Dimon told analysts that rates came down during the third quarter, “so it kind of makes sense that people take advantage of that today,” but “those conditions may not prevail.” 

The bank’s chief financial officer, Jeremy Barnum, added that Chase “did see, for example, a pick up in mortgage applications,” including refinancing business. 

“There might be some hints of more activity there, but these [rate] cuts were very heavily priced, right? The curve has been inverted for a long time, so, to a large degree, this is expected,” Barnum said.

Wells Fargo, meanwhile, reported $5.5 billion in mortgage originations in Q3 2024, a 4% quarterly increase but a 14% yearly decline. While the bank continues to prioritize purchase loans, refinances picked up due to lower interest rates, accounting for 20% of originations compared to 13% in the previous quarter. 

Michael Santomassimo, Wells Fargo’s chief financial officer, noted that “people are still being very prudent about borrowing” due to uncertainties related to the election and the macro landscape. For him, the Fed’s 50-bps cut was “helpful,” but borrowers expect rates to come down “more meaningfully.” 

Analysts at Keefe, Bruyette and Woods said the banks’ volumes were largely in line with industry forecasts. But gain-on-sale margins disappointed. These dropped by 12 bps at JPMorgan, “likely due to a higher correspondent mix,” and by 45 bps at Wells Fargo, which was “likely impacted by one-time items.”

Servicing books

Lower 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 been building their servicing portfolios, positioning themselves to offer refinances when rates drop further and heightening competition in the space. 

In this context, JPMorgan saw a reduced servicing portfolio carrying value at the end of the third quarter. Its MSRs decreased to $8.75 billion, compared to $8.8 billion in Q2 2024 and $9.1 billion in Q3 2023. The bank had $236 million from net mortgage servicing revenues in Q3 2024, up 13% from the previous quarter but down 6% from the same period last year. 

Meanwhile, Wells Fargo’s MSRs declined by 7% quarter over quarter and by 23% year over year to $6.5 billion in Q3 2024. Its net servicing income increased 28% quarter over quarter and 178% year over year to $114 million.  

In terms of home lending revenues, JPMorgan generated $1.29 billion in Q3 2024, down 2% from the previous quarter but up 3% from a year ago.  Wells Fargo’s home lending revenue totaled $842 million, up 2% from Q2 2024, largely driven by higher servicing income. Its mortgage banking non-interest income also rose to $280 million from July through September, compared to $243 million in the previous quarter.

Overall, Wells Fargo reported $5.1 billion in net income in the third quarter. CEO Charlie Scharf noted that the earnings profile “is very different than it was five years ago as we have been making strategic investments in many of our businesses and deemphasizing or selling others.” 

“Our revenue sources are more diverse, and fee-based revenue grew 16% during the first nine months of the year, largely offsetting net interest income headwind.”

JPMorgan, on the other hand, delivered $12.9 billion in profits in the third quarter. Dimon acknowledged growing geopolitical concerns and macroeconomic challenges, pointing to “large fiscal deficits, infrastructure needs, trade restructuring and remilitarization” as unresolved issues.

Looking ahead, both banks face regulatory uncertainty, particularly with Basel III reforms under review.

“Rules can be written that promote a strong financial system without causing undue consequences for the economy, and now is an excellent time to step back and review the extensive set of existing rules — which were put in place for a good reason — to understand their impact on economic growth, the viability of both public and private markets, and secondary market liquidity,” Dimon said.