Will Cheap Mortgages Drive Banking Growth?
Again, mortgage rates have fallen to a new record; now, a 30-year loan will cost homeowners just 3.87%.
The low rate may be good news for retail banks that have returned to the residential mortgage market, such as Wells Fargo (NYSE: WFC), whose investment in residential mortgages surpassed its rivals. While Citigroup (NYSE: C) and Bank of America (NYSE: BAC) look for other sources of revenue, Wells Fargo has made a big bet on mortgages as the future of American banking. A lower rate may drive more homeowners into Wells Fargo's arms as they look for a bargain.
The move towards mortgages has also shielded Wells Fargo from troubles abroad, particularly the neverending eurozone crisis that shook German stalwart Deutsche Bank (NYSE: DB) in its recent earnings call. Troubles in China, whose real estate bubble is beginning to burst, was soon to be a drag on Bank of America's bottom line, prompting it to sell its stake in China Construction Bank (HKG: 0939) last year.
With more money at home, Wells Fargo can focus its energy on the American housing market. Wells Fargo originated $120 billion in mortgages last quarter, making it the top mortgage servicer in the country. Lower interest rates will entice more refinancing, as homeowners hunt for better rates, and Wells Fargo is better poised to attract their business than any other retail bank in America.
However, Wells Fargo cannot depend on one sector alone. It is facing increasing competition for its commercial loans activity, which comprises 40% of the company's lending portfolio. In the last quarter, commercial loans rose only 2% for the bank as businesses struggle to expand in the face of lackluster consumer demand. Other consumer lending is at risk, as American households continue to deleverage while spending less.
There is also the worry that outrage at the major banks will have customers moving to alternatives, such as community banks and credit unions. The Move Your Money project claims that 4 million accounts have moved away from the traditional banks since the project started. While the banks' recent flirtation with new fees is receding from the nation's memory, banks know that they are at the limit of how far they can push customers. Since credit unions can often provide the same basic services that most customers require at a lower cost (some even pay their customers a dividend), Wells Fargo will need to be more competitive while finding more ways to increase its bottom line. So far, mortgages have done the trick, but credit unions offer mortgages too.
In previous years, banks could rely on service chares and fees to pick up the slack from other operations, but increased regulation has limited that option. The Dodd-Frank Reform Act put a tighter cap on interchange fees thanks to the Durbin Amendment, which targets banks with over $10 billion in assets. As a result, fees fell across the board for Wells Fargo, and the entire banking industry may have lost $7 billion in debit card fees alone.
Increased regulation has put other limits on banks, which will stifle their profitability as it limits the risk of another bank-driven economic meltdown. This means that banks will need to find new ways to increase revenues and earnings. Wells Fargo's foray into the mortgage market is a step in the right direction, but investors will need to wait to see if it's enough.
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