4 Large Mortgage Lenders to Consider Now

Maxwell is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.

The repercussions of the housing and related credit crises of last decade continue to reverberate. It is much like an echo that will not go away. After innumerable civil suits from investor losses, mortgage clawbacks, and related administrative suits with fines into the billions of dollars, it is clear that the carnage from last decade will last into 2013 and beyond. But one substantial remnant seems to be on the verge of conclusion. That is the regulatory penalties stemming from foreclosure “robo signing” and other abuses have apparently been successfully negotiated by the nation's largest mortgage lenders last decade.

The New York Times and Reuters have reported that some of the nation's largest banks have agreed to settle matters related to improper foreclosure practices from 2007 to 2009. The Office of the Comptroller of the Currency is seeking total remuneration of roughly $10 billion from 14 different mortgage banks. The five largest banks, from which the vast majority of those funds are being sought, are close to an agreement. The banks are Wells Fargo (NYSE: WFC), Bank of America (NYSE: BAC), JPMorgan Chase (NYSE: JPM), Citigroup (C), and Ally Financial (ALFI), formerly known as GMAC, the finance arm of General Motors (GM). The money, once collected, would be returned to individuals who had been harmed from improper foreclosure proceedings.

During an era of historic interest rate “flatness,” the health of the mortgage industry has been a huge boost to not just the big banks, but to regional banks as well. The pace of mortgage underwriting increase growth is bound to flatten in 2013 from already elevated 2012 levels. But with continuing federal programs like the continued Home Affordable Refinance Program, which we are on the second version of at this time, the mortgage business is not going to fall off the cliff any time soon, either.

The largest mortgage company in this country is Wells Fargo, which held a 29.3% overall market share in mortgage origination as well as being the nation's largest mortgage servicer in the third quarter. More than any other large bank, Wells Fargo views its mortgage customers as a first act to a multi act production.  In its reporting, Wells Fargo has two kinds of customers; its core customers, and those who came to the bank via the Wachovia purchase. The average Wells Fargo core customer held 6.4 accounts with the bank at the close of the third quarter, while those from the old Wachovia footprint still held 5.5 separate accounts. The balance of having loyal and broad relationships with families has given Wells Fargo not just class leading earnings, but also less volatility in earnings than its trillion dollar plus asset peers.

In the third quarter of 2012, Wells Fargo originated $139 billion in mortgages, up from $131 billion in the third quarter of 2011. Its application pipeline actually contracted from a year ago, from $102 billion to $97 billion at the close of the quarter. Wells Fargo has a $1.9 trillion servicing portfolio at the end of the third quarter. That huge business has led the way to the bank's stellar 1.45% return on assets in the third quarter and 57.1% efficiency ratio. The mortgage business will also help the company to maintain some semblance of a net interest margin, which in the third quarter of 2012 stood at an above average 3.66%.

There is no finer big bank than Wells Fargo, and it should be part of most portfolios that seek income (current dividend yield of 2.6%), security, and growth.

JPMorgan Chase, the nation's largest bank, was the second largest mortgage originator in the third quarter of 2012, though its business, with a 10% market share, was barely a third of leader Wells Fargo's. With its huge international business and market leading investment bank, it is understandable that the domestic residential mortgage business is something of an afterthought to bank management. In the third quarter of 2012, JPMorgan wrote $25.5 billion in residential mortgages, up from $22.4 billion in the same period of 2011. But the $563 million in quarterly income the bank received from its mortgage division was a small fraction of the company's overall, $5.7 billion profit.

I have become bullish on JPMorgan, based upon my belief that Europe's investment market climate may be awakening from its long slumber. I look for JPMorgan to earn a little over $20 billion this year, and at least $21 billion in 2013. There will be some near term blips as this mortgage foreclosure, LIBOR situation, and other issues come into play, but I see an earnings powerhouse built for the long haul.

U.S. Bancorp (NYSE: USB) is by a wide margin the smallest of this group by assets, but was still the country's third largest mortgage lender in the third quarter of 2012 with just over $18 billion in residential first mortgages. But more than any other bank, it is hard to look at U.S. Bancorp's numbers and criticize anything about this institution. In the third quarter, its' overall loan portfolio grew 7.3% from the same point in 2011. It recorded a return on assets of 1.7%, a return on equity of 16.5%, and a 50.4% efficiency ratio. Earnings were up 16% from the third quarter of 2011. But the issue remains, how is U.S. Bank going to be able to increase its profit without taking undue risks to increase its loan portfolio? I see the pace of profit growth slowing, and view this peer leading company more or less neutrally.

Until a few years ago, Bank of America was the largest mortgage bank in the country. Times have changed, as the bank wrote only $18 billion in residential mortgages in the third quarter, for a 4.5 % market share. Frankly, it is an astonishingly small amount for a bank of over $2 trillion in assets and over 5500 retail branches. Bank of America has the past few years dealt with an extraordinary smorgasbord of one-time events, asset sales, and legal woes. Among the most recent of these legal entanglements was a $1 billion suit brought the U.S. Department of Justice due to losses suffered from loans acquired by the likes of Freddie Mac (FMCC). Due to the existence still of this and other legal issues, I don't ever have a firm feel for the direction of Bank of America. I therefore can neither endorse the purchase of this company on either a long or short basis.

StockCroc1 has no positions in the stocks mentioned above. The Motley Fool owns shares of Bank of America, JPMorgan Chase & Co., and Wells Fargo & Company. Motley Fool newsletter services recommend Wells Fargo & Company. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. Is this post wrong? Click here. Think you can do better? Join us and write your own!

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