US bank earnings show they completely bought into QE

Federal Reserve Chairman Ben Bernanke must be pleased his plans are working.
Federal Reserve Chairman Ben Bernanke must be pleased his plans are working.
Image: AP Photo/Volker Hartmann, Pool
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Most of the major US banks reported third-quarter earnings this week, and almost all remarked on one notable bright spot: housing. Most saw profits from mortgage loans rising, enough for JPMorgan CEO Jamie Dimon to declare that “housing has turned the corner.”

As my colleague Matt Phillips reports, this should be no surprise. Mortgage lending has never been more profitable for banks, because they’re making a killing by selling their mortgage loans on the secondary markets in the form of mortgage-backed securities, or packages of mortgage-loan debt. The prices on MBS are high now because they’re about to be bought en masse by the Federal Reserve as part of its third round of quantitative easing (better known as QE3). We’ve already seen the effects of low interest rates reflected in economic indicators like housing starts, mortgage applications, and new home sales.

But the earnings reports confirm that the banks are now buying into this trend—the best indicator that QE really does work to revitalize the housing market.

Bank of America CFO Bruce Thomspon told analysts that the bank’s home loans division “had its most profitable quarter excluding asset sales since [it] started reporting its results separately.” CEO Brian Moynihan later added, “We sold them out [as MBS]. We’re looking at retaining some, but it would not be a material amount relative to the overall production of our mortgage business.”

Wells Fargo’s CFO, Timothy Sloan, explained on a conference call on Oct. 15 that the Fed’s policies had made it incredibly attractive to issue loans:

There’s no question that when you look at the mortgage business today, it’s very strong…As you saw this quarter, we decided to hold $9.8 billion of our conforming first mortgage portfolio, primarily because we view it as a very good investment opportunity for us, given the risk/reward of holding those mortgages, which are very high quality versus buying a similar duration MBS at a big premium.

And while Goldman Sachs doesn’t issue typical consumer mortgages, Harvey Schwartz, the global co-head of the bank’s securities division, gave a nod to the impact of the central bank’s policies:

Our Rates business benefited from improved client risk appetite related to Central Bank activities during the quarter. Mortgages was aided by improving housing fundamentals and strong customer demand. Credit results reflected solid client activity levels…What we saw over the quarter, particularly as the Central Bank activity picked up, is you really saw capital moving into things like Treasuries and mortgages.

Adding to his prediction that “housing has turned the corner,” JPMorgan’s Dimon explained that his bank is stomaching lower interest rates for the profits it can get:

[L]ower rates hurts you a little bit, but it obviously helps mortgage origination and, ultimately, housing prices, because low rates can drive that part of the economy a little bit. If it were to drive the economy, and I’m not sure it will, that would be a plus for us. So I think [the Fed is] doing [its] job not to help things or hurt things, but to try to drive the economy and drive jobs. If that works, it’s a good plus. I personally think that the fiscal policy is going to be more important than the Fed policy soon.

Of banks that have reported earnings so far, only PNC Chairman & CEO James E. Rohr was skeptical:

One of the things, Scott, is that—one of the things we’re not doing is we’re not putting long-dated mortgages on our balance sheet. As Rick said, we’re remaining short. We don’t think you’re getting paid to take risk and—take that kind of long-dated risk in this interest rate environment. So that’s one thing that you might see other banks doing and going out the yield curve either on the securities book or even more so in booking residential mortgages on their balance sheet. It’s just something that we don’t think that’s the right risk to be taking at this time.