JPMorgan Chase’s Q2 mortgage income may be a harbinger for others

If JPMorgan Chase’s results for its home lending business lending are an indicator, mortgage companies could be seeing significant quarter-to-quarter declines in origination revenue due to competitive pressures.

“JPMorgan Chase’s mortgage banking results were generally a bit weaker than our expectations as strong, resilient volumes were overshadowed by a sharp reduction in gain-on-sale profitability,” Bose George of Keefe, Bruyette & Woods wrote in a flash note, adding the “slightly negative” change to the bank’s mortgage servicing rights valuation was in line with his expectations. “While we view the read-across from JPMorgan Chase as useful, we think earnings from Wells Fargo tomorrow should be a broader indicator of industry trends.”

The company’s total mortgage fees and related income, taking into account both origination and servicing activities, was $548 million for the second quarter, compared with $703 million the previous quarter and $917 million for the second quarter of 2020.

For the first quarter, JPMorgan reported $517 million in production revenue, down 32% from the first quarter’s $757 million, and 30% from $742 million one year ago.

The decline in revenue occurred even as mortgage origination volume increased 4% compared with the first quarter and a whopping 173% over the second quarter of 2020.

JPMorgan originated $39.6 billion in the second quarter, compared with $39.3 billion in the first quarter and $24.2 billion one year ago. The mortage industry at large is expected to see a 4% quarter-to-decline in volume, according to the Mortgage Bankers Association’s June forecast.

Gain on sale margins fell by 61 basis points from the first quarter to 131 bps. “The retail/correspondent mix at JPMorgan Chase was roughly flat quarter-to-quarter (from 59%/41% to 57%/43%, respectively), so we do not believe channel mix shift was a large contributor to the gain on sale margin delta,” George said.

The bank’s correspondent channel had $16.9 billion in volume in the second quarter, up from $16.3 billion in the first quarter. In the second quarter last year, when secondary market was reeling from the initial impact of the pandemic, the correspondent channel produced $6.2 billion.

JPMorgan Chase serviced $463.9 billion as of June 30, up from $443.2 billion three months prior but down from $482.4 billion one year ago.

The MSR carrying value for the quarter was 97 bps, down from 102 bps on March 31 but up from 64 bps on June 30, 2020. The quarter-to-quarter decline was consistent with KBW’s expectations given that rates for the 30-year fixed loan fell 20 bps during the quarter, George said.

Still, net servicing revenue returned to profitability at JPMorgan Chase at $31 million, compared with a $54 million loss in the first quarter; in the second quarter of 2020, the bank made $175 million in net servicing revenue.

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