Banks Post Sharp Drop in Home Loan Profits

Major home lenders Wells Fargo & Co. and Washington Mutual Inc. reported sharply lower first-quarter profits from their mortgage businesses Tuesday, reflecting increased competition and rising short-term interest rates.

The mortgage industry has been under stress recently as fewer homeowners have refinanced loans, higher short-term borrowing costs have pinched lending margins, competition has intensified and regulators have increased their scrutiny of certain riskier loans.

San Francisco-based Wells Fargo, the nation’s fourth-largest commercial bank, reported 9% higher overall quarterly profit on growth in deposits and business lending. Earnings also rose 9% at Seattle-based Washington Mutual, the largest savings and loan, on strong branch and credit-card results.

But both companies said mortgage profits sank despite an increase in loan volume. Wells Fargo and Washington Mutual are the second- and third-largest U.S. home lenders, respectively, after Countrywide Financial Corp. in Calabasas.

Minneapolis-based U.S. Bancorp, the fifth-largest bank, reported 8% higher earnings on increases in various fees, but said that the mortgage crunch contributed to a 1% drop in its lending profit.

A predicted shake-out in the mortgage industry is underway among lenders that provide higher-interest loans to borrowers with bad credit or other financial issues.

One such lender, ECC Capital Corp. of Irvine, reported a $50-million quarterly loss Monday and said it was hiring investment bankers to consider its options. Another, Acoustic Home Loans of Orange, shut down Friday.

Wells Fargo, the largest California-based bank, earned $2.02 billion, or $1.19 a share in the quarter, up from $1.86 billion, or $1.08, a year earlier.

Overall revenue rose 6% to $8.6 billion from $8.1 billion, but revenue from mortgages tumbled to $853 million from $1.52 billion in the first quarter of 2005. Excluding the mortgage results, revenue rose 17%.

Wells Chairman and Chief Executive Richard Kovacevich attributed the improved net result to a “financial supermarket” strategy of selling multiple products to customers, so that a decline in one business would be offset by gains in others.

Wells’ community banking division, which includes consumers and small businesses, reflected a slowdown in the mortgage business. Revenue fell by 1% to $5.4 billion and net income declined 11% to $1.2 billion.

Wholesale banking, which serves larger businesses, reported net income of $528 million on revenue of nearly $1.8 billion, both 17% higher than a year earlier.

Wells shares rose 60 cents to $65.06.

Washington Mutual’s overall profit rose to $985 million from $902 million a year earlier, with revenue of $3.84 billion, up from $3.3 billion. Per-share earnings fell to 98 cents from $1.01, reflecting additional stock issued as part of the thrift’s purchase last year of Providian Financial Corp., a credit-card issuer.

Non-interest income, including fees, rose 29% to $1.73 billion, and net income from retail banking rose 11% to $660 million. But profit from home loans fell to $38 million from $323 million in the first quarter of 2005.

Washington Mutual shares rose 51 cents to $44.44 before trading was suspended when a portion of its earnings report was released prematurely, the bank said. It was supposed to have released earnings after the markets closed.

U.S. Bancorp earned $1.15 billion, or 63 cents a share, up from $1.07 billion, or 57 cents a share, a year earlier. Revenue rose 7% to $3.34 billion. U.S. Bancorp shares rose 17 cents to $30.55.