Refinance News: Dissecting Wells Fargo's Third Quarter Results

[Oct 22, 2009.]

 

As the biggest mortgage lender in the land and a major source of refinance funds, what happens at Wells Fargo does not stay at Wells Fargo, but instead affects the entire mortgage industry.

Therefore, looking at Wells Fargo's earnings can be a worthwhile endeavor for borrowers seeking to obtain a new home loan or a refinance.

Refinancing Can Be Profitable for Banks After All

The major headline of Wells Fargo's third quarter earnings is good news for both banks and mortgage borrowers: it is still possible to make a lot of money refinancing home loans.

Wells Fargo absolutely crushed their numbers, bringing in $3.24 billion in earnings, up from $1.64 billion for the same period in 2008. Analysts had expected earnings of 37 cents per share, but Wells delivered 56 cents per share instead.

A big part of the successful Wells Fargo equation is the mortgage division. Despite the downturn in housing prices, Wells is still doing an extremely brisk business granting customers new home loans and funding refinances, reporting mortgage origination earnings of $96 billion in the third quarter.

That's more than triple the volume from the same period in 2008.

Loan Losses Are What to Watch as Banks Seek Firm Footing

Wells Fargo has reported 355,000 loan modifications so far in terms of mortgages, and expects further losses from consumer lending, especially credit cards. With the government doing everything it can to make it easy for banks to say "yes" to refinance applications, loan losses appear to be the albatross around the mortgage market's neck at this point, weighing everything down.

Analysts predict that consumer loan losses will peak in early 2010. At the risk of over-simplifying a complex matter, banks will likely be more willing to lend when they feel like they're not about to go under because no one is paying their credit card bills.

For banks that are not reporting blow-out earnings, the strained relationship between lending and being paid back loans is all the more acute.

Mortgage Service-Hedging a Profitable Strategy

Another interesting tidbit from the Wells Fargo third quarter report was the fact that Well Fargo made $1.5 billion "hedging" risks associated with mortgage servicing. This is not the forum for a complete explanation of hedging, but suffice it to say that refinancing makes this strategy work.

Essentially, Wells Fargo trades interest rates, selling the "collectability rights" of home loans to third parties--and then, when interest rate drop, everyone rushes to refinance...and Wells is there to help.

 

About Author:

Andrew Freiburghouse is a writer and businessman. He has worked as a magazine reporter, tax preparer, screenwriter, copywriter, and loan officer. He graduated from Santa Clara University in 1999 with a B.A. in English. Andrew was born and raised in the City of Los Angeles.