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Mortgage-refinancing Boom Fizzling, Sign of Worsening Economy
Monday, April 15, 2013 9:25 AM

Two of the nation's largest banks released first-quarter results last Friday that showed significant slowdowns in their home-loan machines. J.P. Morgan Chase & Co., the largest U.S. bank by assets, said revenue in its most recent quarter fell 4 percent from the same period a year earlier.

Wells Fargo & Co., the fourth-largest bank, reported a 1.7 percent revenue drop.  The performances underscore expectations for a slowing economy over perhaps the next couple of quarters.

Other economic data released Friday reinforced the worries. U.S. retail sales fell 0.4 percent, the biggest decline since last June, while consumer sentiment slipped despite expectations from economists that it would increase. The producer-price index, a measure of inflation, declined by more than expected in March, while business inventories fell short of expected increases.

Five years after the financial crisis, U.S. banks are still dealing with the hangover. The biggest institutions face numerous government and investor lawsuits over mortgage securities. New regulations requiring higher reserves are causing banks to miss out on billions of dollars in potential annual revenue while low interest rates crimp profit margins.

The lackluster performance from two of the industry's sturdiest banks is a troubling sign as rivals prepare to report first-quarter results in the coming weeks and could deepen concerns about how quickly banks will be able to replace income being squeezed by new regulations and the sluggish economy.

Mortgage refinancing had been one bright spot in recent quarters. The mortgage-banking operations of U.S. banks and thrifts reported profits of $31.9 billion last year, about six times the amount notched in 2011 and the largest total in at least a decade, according to mortgage tracker Inside Mortgage Finance.

But that pace is slowing even while housing affordability remains excellent. Wells Fargo, the nation's largest home-loan provider, said income from that business declined 2.7 percent as applications for new mortgages fell. J.P. Morgan Chase, the second-largest home lender, said mortgage profits fell 31 percent.

Despite the slowdown in mortgages, both banks saw a boost in overall profit, showing how the biggest institutions can use their huge balance sheets and broad reach to make money during leaner periods. J.P. Morgan's net income rose 33 percent, to $6.53 billion, or $1.59 a share, as a jump in investment-banking income and a cut in expenses helped cushion the mortgage pullback.

Wells Fargo's profit gained 22 percent, to $5.1 billion, or 92 cents a share, as the San Francisco bank reported cost savings.

(Source: The Wall Street Journal, 13 April 2013)