Wells Fargo surprised markets, and gave them a boost, by forecasting record first-quarter profit.

Wall Street jumps on mortgage resurgence

PAUL WALDIE,  From Friday's Globe and Mail

Mortgage lending is making a surprising comeback in the United States, thanks mainly to low interest rates and the disappearance of "irrational" lenders.

On Thursday, Wells Fargo & Co. stunned investors by saying it expects to report a record profit of $3-billion (U.S.) in the first quarter, owing to a surge in its mortgage business. The bank said it handled $190-billion worth of mortgage applications in the quarter, up 64 per cent from the last quarter of 2008. In March alone, the San Francisco-based lender said it processed a record $83-billion worth of mortgage applications.

"We had incredible [mortgage] volume increases in the quarter," said Howard Atkins, the bank's chief financial officer. "People are buying homes."

The outlook was far better than most analysts expected and sent stocks soaring. The Dow Jones industrial average leaped nearly 250 points and the S&P 500-stock index rose 4 per cent. Wells Fargo's stock gained 32 per cent and pushed up shares of other banks too.

U.S. President Barack Obama also cited a jump in mortgage lending Thursday, noting that refinancing applications have increased 88 per cent since Feb. 18.

That's when the government announced plans to stimulate the housing market.

"We are at a time where people can really take advantage of this," Mr. Obama said.

Fannie Mae, a government-controlled mortgage company, said it refinanced $77-billion of mortgages in March, nearly twice the February amount and the highest volume in one month since 2003. Mortgage rates have fallen to a 30-year low.

Banking giants Citigroup Inc. and Bank of America have also indicated they posted decent profits in the January-to-March period. All of the banks are slated to begin reporting detailed first-quarter results next week and many analysts are now expecting signs of a turnaround.

"The mindset is: The banks cannot do well," said Richard Bove, banking analyst at Rochdale Securities.

"But the banks are in a stronger position than anyone expected."

Mr. Atkins said about 75 per cent of Wells Fargo's mortgage activity involved homeowners seeking to take advantage of low rates and refinance their mortgages. Normally that's bad news for lenders because they make less money on the new, lower-interest loan. But Mr. Atkins said the overall market is improving so much that even these loans are profitable.

"Relative to where the industry was two or three or four years ago, the mortgage business is a more profitable business simply because many of the irrational players in that market are no longer in business," he said in a television interview.

Mr. Atkins also pointed out that 25 per cent of the U.S. mortgage activity went to people buying new homes and said, over all, the quarter was one of the best for mortgage lending since the housing market collapsed two years ago.

The housing sector "is not out of the woods yet," he added, but mortgage lending is picking up even in states such as California, which have felt the brunt of the housing meltdown.

One big player that is no longer in the lending business is Wachovia Corp., which dominated the market for subprime loans in California and several other states. Wachovia was among the banks hit hardest when the real estate market began to sink in 2007. Wells Fargo bought the company last fall in an all-stock deal worth about $15-billion.

On Thursday, Wells Fargo said the old Wachovia operations reported strong results and had moved out from under much of its bad lending. Wells Fargo said it expected to take a charge of $3.3-billion in the first quarter for bad loans, mainly associated with Wachovia. That was about half the charge recorded in the fourth quarter of 2008.

There are still some troubling signs in the mortgage market, however.

Wells Fargo is holding about $95-billion worth of Wachovia's most problematic subprime mortgages, including "pick-a-payment" loans, where borrowers got to decide their monthly payment for a certain period of time before the loan resets at a much higher interest rate.

Such loans were popular when house prices were soaring, but they have become toxic today.

Analysts worry that adjustable-rate mortgages issued at the peak of the U.S. housing boom will reset at higher rates this year and cause another wave of foreclosures.

Wells Fargo has said 20 per cent of the adjustable-rate mortgages it inherited from Wachovia will reset this year. The bank added that the recent cut in interest rates should cushion the blow for these mortgage holders.

Wells Fargo has set aside more money to cover problem loans, raising its total provision by $4.6-billion in the first quarter to $23-billion. Some analysts say that may not be enough if the U.S. economy continues to cut jobs.

With files from Associated Press