US banks' mortgage originations, fee income rise in Q4 2023 as pressures ease

Mortgage origination pressures eased in 2023 as interest rate increases stalled and home price increases cooled.

US banks' one- to four-family mortgage originations rose in each of the last three quarters of 2023, a sharp contrast to six straight sequential declines beginning in the fourth quarter of 2021, as the Federal Reserve ceased its rapid rate increase campaign and home prices weakened year over year. As a result, more banks were able to originate mortgages which boosted their noninterest income.

That steady activity increase continued into 2024, but low inventory remains a challenge, Wintrust Financial Corp. Vice Chairman and Chief Lending Officer Richard Murphy said during a conference presentation on March 5.

"January was a decent month off in December, and it was better than the year prior. February looked a little better than January. The first couple of days in March look good, lots of pre-[qualifying] activity," he said. "There's a tremendous amount of interest in the purchase side of the business. The inventory is the problem. I mean there's just a lot of people out looking right now, but they're having a hard time finding something. So we're optimistic that things are going to shake loose."

US banks held $2.837 trillion of one- to four-family mortgages in 2023, up from $2.753 trillion the year before. The uptick in US bank' mortgage portfolios and originations was partly due to a cooling in home prices.

Although home prices increased further during the 2023 fourth quarter, house price growth for full year 2023 was weaker than the prior year. The Federal Housing Finance Agency Home Price Index rose about 5.0% year over year in 2023, whereas in 2022, it rose 13.8% year over year.

Despite the reprieve, US banks' yearly mortgage originations were still down from historical performance. Originations fell to $311.93 billion in 2023 from $437.01 billion in 2022. They also dropped as a percentage of gross loans and leases to 2.5% from 3.6%.

Western Alliance Bancorp. originated $10.07 billion in mortgages during the 2023 fourth quarter, the most of any bank. The bank expects mortgage activity to continue its steady revival in 2024.

"We're encouraged that with the recent low-rate environment, application volume is picking up with firmer margins thus far in early 2024," Western Alliance CEO Kenneth Vecchione said during a 2023 fourth-quarter earnings call in January.

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JD Bancshares Inc. subsidiary JD Bank saw the largest year-over-year increase in mortgage originations among the top 20 US banks with the most mortgage originations in the last quarter of 2023 with an increase of 58,291.2%. Mortgage activity should continue to increase as "more potential buyers understand that mortgage rates may not return to the low levels seen in recent years," the company wrote in its 2023 fourth-quarter earnings release.

The slight increase in originations over the past three quarters helped boost banks' fee income.

Noninterest income on one- to four-family residential loans rose in the fourth quarter of 2023 as a percentage of total noninterest income to 2.5% from 1.4% in the previous quarter. Still the 2023 fourth quarter was below the second-quarter 2023 peak of 2.6%.

Of the top 20 banks by one- to four-family mortgages, those home loans made up the highest percentage of U.S. Bancorp's gross loans at 34.7%. Following it was Citizens Financial Group Inc. with 31.7% and then RBC US Group Holdings LLC with 31.3%.

Citizens Financial Group Head of Consumer Banking Brendan Coughlin described retail mortgages as "challenged," but poised for a rebound "as the rate environment dictates opportunities there," he said during the company's 2023 fourth-quarter earnings call in January.

"We should see some modest uptick in originations," Coughlin said.