Wells Just Reported The Worst Mortgage Number Since The Financial Crisis

When we reported Wells Fargo's Q4 earnings back in January, we drew readers' attention to one specific line of business, the one we dubbed the bank's "bread and butter", namely mortgage lending, and which as we then reported was "the biggest alarm" because "as a result of rising rates, Wells' residential mortgage applications and pipelines both tumbled, specifically in Q4 Wells' mortgage applications plunged by $10bn from the prior quarter, or 16% Y/Y, to just $63bn, while the mortgage origination pipeline dropped to just $23 billion", and just shy of the post-crisis lows recorded in late 2013.

Fast forward one quarter when what was already a grim situation for Warren Buffett's favorite bank, has gotten as bad as it has been since the financial crisis for America's largest mortgage lender, because buried deep in its presentation accompanying otherwise unremarkable Q1 results (modest EPS and revenue beats), Wells just reported that its 'bread and butter' is virtually gone, and in Q1 2018 the amount in the all-important Wells Fargo Mortgage Application pipeline failed to rebound, and remained at $24 billion, the lowest level since the financial crisis.

Yet while the mortgage pipeline has not been worse since in a decade despite the so-called recovery, at least it has bottomed. What was more troubling is that it was Wells' actual mortgage applications, a forward-looking indicator on the state of the broader housing market and how it is impacted by rising rates, that was even more dire, slumping from $63BN in Q4 to $58BN in Q1, down 2% Y/Y and the the lowest since the financial crisis (incidentally, a topic we covered just two days ago in "Mortgage Refis Tumble To Lowest Since The Financial Crisis, Leaving Banks Scrambling").

Meanwhile, Wells' mortgage originations number, which usually trails the pipeline by 3-4 quarters, was nearly as bad, plunging $10BN sequentially from $53 billion to just $43 billion, the second lowest number since the financial crisis. Since this number lags the mortgage applications, we expect it to continue posting fresh post-crisis lows in the coming quarter especially if rates continue to rise.

Adding insult to injury, as one would expect with the yield curve flattening to 10 year lows just this week, Wells' Net Interest margin - the source of its interest income - failed to rebound from one year lows, and missed consensus expectations yet again. This is what Wells said: "NIM of 2.84% was stable LQ as the impact of hedge ineffectiveness accounting and lower loan swap income was offset by the repricing benefit of higher interest rates." Not sure one would call this trend "stable" shown visually below:

There was another problem facing Buffett's favorite bank: while NIM fails to increase, deposits costs are rising fast, and in Q1, the bank was charged an average deposit cost of 0.34% on $938MM in interest-bearing deposits, exactly double what its deposit costs were a year ago.

And finally, there was the chart showing the bank's consumer loan trends: these reveal that the troubling broad decline in credit demand continues, as consumer loans were down a total of $9.5BN sequentially across all product groups, far more than the $1.7BN decline last quarter.

What these numbers reveal, is that the average US consumer can not afford to take out mortgages at a time when rates rise by as little as 1% or so from all time lows. It also means that if the Fed is truly intent in engineering a parallel shift in the curve of 2-3%, the US can kiss its domestic housing market goodbye.

Source: Wells Fargo Earnings Supplement

Comments

spastic_colon Fri, 04/13/2018 - 08:48 Permalink

hey everyone take the day/month off; fake earnings season has started in earnest, on a friday no less, and the fix is in; everyone from potus to wall street to CB's did a bang up job keeping the indexes at these levels so now the CFO's can take over with phony earnings perfectly timed throughout the next 2 months until the next batch of fake economic reports and fed meetings......its the new normal virtual markets.

Blankfuck Fri, 04/13/2018 - 08:48 Permalink

What ? No worry!

All is great in PONZI LAND USA!  The Fed Reserve Fuckers print, The Bankster Fuckers grab, leaving Americans holding the bag!

And the CNBC Cheerleaders are promoting how great it all is in la la land

corporatewhore Fri, 04/13/2018 - 08:54 Permalink

Incomes really haven't increased.  The cost of food has exploded as sizes have diminished.  There are many, many people who have never recovered from 07/08 and even if they have can't tolerate either the stress and emotions of losing a home--they barely held the family together.

Gotta put the kids to work to buy these homes at the prices being asked.

yellowsub Fri, 04/13/2018 - 08:56 Permalink

It looks like Quicken / Rocket Mortgage is doing well in lending... 

Maybe they swiped all their subprime candidates that's tired of filing out forms on paper.

RedNemesis Fri, 04/13/2018 - 08:56 Permalink

This will put pressure on them to lower financial soundness testing on mortgage applicants to boost volume.  So get ready for a another round of defaulting mortgage loans in the years to come.

wwwww Fri, 04/13/2018 - 09:06 Permalink

2.5 million counts of identity theft adds up to 7.5 million years in jail, but they can cut that in half with good behavior.

MusicIsYou Fri, 04/13/2018 - 09:06 Permalink

Only morons are buying most homes today anyway. Driving around what I notice is many homes for sale are on streets and roads in bad condition. That tells me the town is bankrupt, mismanaged, and local taxes will be increasing off the charts. I won't look at houses on streets that appear too broken, and only idiots do. Most communities are going to become dysfunctional and unfixable well before homes get paid for anyway.

MusicIsYou Bill of Rights Fri, 04/13/2018 - 09:10 Permalink

Proven fact:most communities around the U.S are bankrupt and fatally mismanaged. I'm surprised any mortgage lenders are making quotas, and I can only credit it to the ignorant American population that buys homes in an "ideal" state of mind rather than a "realistic" state of mine. They exist in a delusional sense of the true state of their country, and then they still buy homes. Anyone who finances a 30 year mortgage today, will never own that home before their community falls apart.

In reply to by Bill of Rights

Honest Sam Fri, 04/13/2018 - 09:11 Permalink

Good. Maybe the shoddy, stick construction new multiple housing units' prices will come back down to earth. They are at least 40% overpriced.

 

shovelhead Honest Sam Fri, 04/13/2018 - 10:09 Permalink

You prefer daub and wattle? Stick framing has been around for well over 200 years and plywood sheathing has more shear strength than plank. OSB (strand board) is basically equal in strength to plywood. Properly installed and weather protected, these types of sheathing are more than acceptable for home framing.

Cheap credit and excessive realtors fees drive prices up because they decrease competition with an excess of buyers. The converse is also true. A big corporate builder came into my small town years ago and planned to build 50 homes on the edge of a swamp. Rates were rising and they tried selling during the summer. The mosquitos were so bad they didn't sell a single home and they just finished the 15 homes they started. They sat until they were practically giving them away to no doc buyers.

I guess it didn't help that some nearby kids kept painting over the project sign with "Skeeter Flats".

In reply to by Honest Sam

MusicIsYou Fri, 04/13/2018 - 09:24 Permalink

People I know are selling and buying homes they can pay for outright. Only dorks today finance homes, meanwhile in most U.S communities you can just see the decay moving throughout the U.S. It would be like some idiot financing a new car even though you can literally see the rusts moving on it.

PitBullsRule Fri, 04/13/2018 - 09:25 Permalink

I have used Wells Fargo for almost 3 decades, at times I've kept way too much money in their bank. I went in a few years ago and asked them for a mortgage, on a house I would live in. They know my income because I have had direct deposit with them for many years, and they turned me down. So I got a good loan from a bank in another state, at a good rate.

Wells Fargo reminds me of Sears, if there is a way to disappoint you, they will find it.

Princess Luna Fri, 04/13/2018 - 09:57 Permalink

It's their own damned fault.  Their mortgage qualification requirements are so strict, I can't imagine how anyone gets a mortgage through them.  I was flat out denied when I went to apply for a mortgage directly at Wells Fargo.  Then I visited a mortgage broker and was approved instantly for 2x what I needed.  I asked the broker if I was a subprime candidate or otherwise someone that wasn't ideal to lend to, and she said that I was a great candidate and I got a great interest rate. 

The same shit happened when I applied for an auto loan through Wells Fargo.  I applied for an $80,000 auto loan and was approved for - get this - $15,000.  I fucking have nearly $100,000 in my bank account for fucks sake!  Why the fuck would I need $15,000?  I reluctantly applied through the dealership and was approved instantly.  I didn't end up buying the new Escalade.  In the end I went with a used one for $30,000.  But I was approved for the new Escalade instantly though another lender when Wells Fargo treated me like subprime trash.  I'm not going to waste my time even applying at Wells Fargo anymore because I know all they'll give me is 20% of what I need, if I'm not just flat out denied.  My credit score is 760 and my debt to income ratio is about 20%, including my mortgage.  I just don't get what their problem is.  Is Wells Fargo the millionaire's bank or something?