Wells Crippled By Mortgage Pipeline Shutdown: Net Interest Margin Slides, Reserve Release Soars

Take all the talk about how "soaring" (to below 3%) rates will not impact housing, or that rising rates are great for banks because they help boost Net Interest Margins, and dump it in the trash. Why? Exhibit A - Wells Fargo, the bank which is most reliant on the housing market (unlike such prop trading powerhouses as JPM and Goldman) to generate revenues (which missed expectations) which just announced its Q3 earnings. The numbers of note were not among the fudged top or bottom-line headline grabbers. They were far uglier, and were as follows.

First, in order to "beat" the EPS of $0.97, with an EPS $0.99 print, or $5.6 billion, the bank was forced to dig deep in its bag of accounting gimmickry and pull out a whopping $900 million in loan loss reserve releases, driven by a $1 billion net charge off number, offset by just $0.1 billion in provisions: at least the latter number was not negative. This was the highest release since 2011 and a surge compared to recent trends.

Next, remember how every pundit was jumping on their head proclaiming that as a result of soaring rates, Net Interest Margins would explode higher leading to an EPS boost? Well, as usual, the experts were 100% wrong. At 3.38% this was the lowest ever, and also well below the 3.43% expected. Oops.

But the biggest pain was in the company's pure play primary line of business: mortgage origination. And as we have been pointing out all quarter, as a result of a 100 bps jump in rates since the taper talk in Q2, consumers' propensity to begin the mortgage pipeline, has plunged. Sure enough, Wells was kind enough to point that out moments ago, when it said that its Q3 mortgage originations were a multi-year low $80 billion, or a 29% drop sequentially, and a massive 42% Y/Y.

So: what is this housing "recovery" (aside from the foreclosure stuffing, the offshore money laundering, and the now finished REO-To-Rent scheme) everyone keeps talking about again?

Source: Wells Fargo