Plummeting Mortgage Originations at Wells Fargo Don't Mean What You Think

If you've ever doubted the importance of interest rates to the underlying economy, then allow me to disabuse you of that notion.

Earlier this week, Wells Fargo , which is far and away the nation's largest mortgage lender, acknowledged that rising interest rates drove its mortgage underwriting volume down by a staggering 60% in the final three months of 2013, compared to the year-ago period.

As chief financial officer Timothy Sloan noted on the company's earnings call, "we've experienced the biggest impact [...] from an interest rate sensitivity standpoint when you think about the impact [it] had in the third and fourth quarter from the rate rise and the impact on the mortgage business."

Adding insult to injury, the downward trend at Wells Fargo was sharper than at other too-big-to-fail banks like JPMorgan Chase and Bank of America . Compared to the same period in 2012, JPMorgan Chase's mortgage volume fell by 54% while Bank of America's declined by 40%.

The consolation prize, of course, is that Wells Fargo has nevertheless become the nation's most profitable lender. Thanks to soaring legal costs at JPMorgan Chase, the nation's largest bank by assets ceded its position on Tuesday as the U.S. bank with the highest annual profit to the California-based Wells Fargo.

For the 2013 fiscal year, JPMorgan Chase earned $17.9 billion, a 16% drop from 2012, compared to Wells Fargo's $21.8 billion, a 16% year-over-year rise.

In light of this, you'd be excused for wondering exactly why Wells Fargo performed so poorly in its primary wheelhouse -- that is, home lending -- and particularly when it was up against a ne'er-do-well like Bank of America, which retreated almost entirely from the mortgage market in the wake of the financial crisis.

The answer to this question is twofold. In the first case, the relative magnitude of the decline was a reflection of Wells Fargo's prevailing dominance in the market for home loans more than anything else -- prior to the most recent quarter, it underwrote roughly a third of all mortgages in America.

As Sloan explained on Tuesday:

We've talked, on a number of occasions, about how our market share over the last couple of years was disproportionately high, primarily because the biggest driver for origination volume until the last couple of quarters was refinances.

And the reason for that, again to remind everybody, is that we're the largest servicer and the quality of our servicing book was the highest in the industry, so we had many more opportunities than most to be able to meet the needs of our customers by refinancing [existing customers' mortgages].

So it's not surprising -- and [it's] something that we had been indicating was going to occur as the percentage of refinance volume declined, absolute dollars as well as the percentage of the total decline -- that our market share would go down.

In other words, because Wells Fargo was the biggest player in the space, it had the most to lose with the change in interest rates.

As a corollary, moreover, because both JPMorgan Chase and particularly Bank of America have considerably smaller presences in the mortgage market, it isn't surprising that their falls weren't as dramatic -- though, to be fair, they too took significant hits in this regard.

What this means going forward?
With no intent to be flippant, I'd argue that it means nothing -- that is, at least as far as Wells Fargo's current and prospective shareholders are concerned.

As our top analysts discuss in this invaluable free report, Wells Fargo is far and away one of the best banks in the country. It's exceptionally profitable, equally prudent in terms of risk management, and it's made shareholders a fortune over the past few decades. This is why it's referred to as the "only big bank built to last."

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John Maxfield owns shares of Bank of America. The Motley Fool recommends Bank of America and Wells Fargo. The Motley Fool owns shares of Bank of America, JPMorgan Chase, and Wells Fargo. 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.

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