With mortgage rates at a two-year high, two of the country's top banks cautioned of a further slowdown in mortgage lending.
But executives at both JPMorgan Chase & Co. and Wells Fargo & Co. indicated Friday that rising rates and a strengthened economy will help, not hurt, overall business.
Both bank giants reported stronger-than-expected profits Friday, getting the second-quarter bank earnings run off to a strong start. Wells Fargo, the nation's largest home lender, saw profits jump 19 percent from the same time last year to $5.5 billion. A good portion of the increase came from what has become a ritual, setting aside less for future loan losses — in this case $500 million less. JPMorgan Chase saw profits surge 31 percent to $6.5 billion.
But the outlook is clouded with questions about how a broader rise in interest rates will impact the many and disparate businesses of both banks. Mortgage banking income dropped 3 percent at Wells Fargo from last year, and 14 percent at JPMorgan Chase. While the mix of mortgages is shifting, it isn't clear how quickly loans for purchasing homes can make up for the drops in refinancing mortgages.
Generating some shock ripples, JPMorgan Chase CFO Marianne Lake told analysts that if mortgage rates stay at or above current levels, the overall market could shrink by 30 to 40 percent in the second half of the year.
"Although we will adjust capacity, expense reductions will lag volume reductions, and will challenge profitability and production," Lake said.
A more upbeat John Stumpf, CEO of Wells Fargo, said volumes will be down in the current quarter, but said he can't predict much beyond that. "We think volume is going to be down but whether it's going to be 30 or 40 percent I just don't know," he told analysts.
Stumpf said he thinks the benefits to his bank of the country's improving housing market "are yet to come."
Mortgage banking is an important horse for Wells Fargo's stagecoach, generating about one-quarter of the bank's noninterest fees, and the slowdown comes as banks of all sizes sweat to grow their book of overall loans. Wells Fargo's average loan levels have been inching up in the low single digits, year-over-year, for several quarters now.
Stumpf repeatedly reminded analysts that the bank has 90 different businesses and can withstand change in the mortgage market.
"We are not dependent on any one business to generate growth."