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NATION'S LARGEST SERVICERS RELEASE MIXED EARNINGS REPORTS Wells Fargo and JPMorgan Chase both released their earnings summaries for the third quarter October 11, but with very dissimilar fanfare. They were the first of the big banks to announce their quarterly results, and their two reports paint a very mixed picture. Wells Fargo raked in record profits, while JPMorgan Chase reported its firstever loss under CEO Jamie Dimon's watch. For the 10th straight quarter, Wells Fargo reported a new record for net income, posting a profit of $5.6 billion, a 13 percent increase over the same period last year. For the first nine months of the year, Wells—the nation's biggest name in home lending—pulled in $16.3 billion compared to $13.8 billion for the same time period last year. Wells Fargo chairman and CEO John Stumpf cited the improving housing market as one of the biggest factors in the bank's rising profits, though mortgage business was down. Third-quarter originations totaled $80 billion, down from $112 billion in Q2 2013, while net mortgage servicing rights (MSRs) results were $26 million compared with $68 million the prior quarter. The company benefited from a decline in the amount set aside for repurchase losses—$28 million compared to $65 million in Q2. Wells Fargo reached an $869 million agreement with Freddie Mac in late September to settle repurchase claims on loans sold before and at the start of the housing crash; those funds were already covered by the bank's accrued repurchase reserves and did not affect third-quarter numbers. Wells Fargo CFO Tim Sloan described the company's third-quarter results as "solid." He said, "As expected, mortgage banking revenue was lower in the quarter as the recent increases in interest rates reduced refinance volume, but this impact was partially offset by improved credit and lower expenses." JPMorgan's earnings, on the other hand, sank under the weight of a $9.2 billion pretax legal expense, which included reserves for litigation and regulatory proceedings. For the quarter, the bank reported a net loss of $380 million. A year ago, Q 3 profits totaled $5.7 billion. 44 Taking that one-time legal cost out of the equation, JPMorgan says its third-quarter net income would have been $5.8 billion. "While we had strong underlying performance across the businesses, unfortunately, the quarter was marred by large legal expense," said chairman and CEO Jamie Dimon. "While we expect our litigation costs should abate and normalize over time, they may continue to be volatile over the next several quarters." Dimon added that JPMorgan's board "continues to seek a fair and reasonable settlement with the government on mortgage-related issues—and one that recognizes the extraordinary circumstances of the Bear Stearns and Washington Mutual transactions," which he stressed were undertaken at the government's urging. Mortgage banking net income for JPMorgan Chase was $705 million—an increase of 13 percent over the previous year—reflecting a lower provision for credit losses offset by lower net revenue. Originations totaled $40.5 billion, a drop of 14 percent year-over-year and 17 percent quarter-overquarter. Application volumes were $40.4 billion, down 45 percent from the prior year and down 38 percent from the prior quarter. Next in line for the earnings roll call was Citi. Citigroup reported a third-quarter net income of $3.2 billion on October 15, slipping somewhat as higher interest rates took a bite out of mortgage revenues. According to Citi's quarterly earnings summary for Q 3, Global Consumer Banking (GCB) revenues fell 7 percent year-over-year to $9.2 billion "as significantly lower refinancing activity and continued spread compression globally more than offset the ongoing volume growth in most international businesses." In North America alone, GCB revenues fell 12 percent to $4.7 billion, driven mainly by a decline in retail banking revenues, which in turn reflected lower mortgage origination revenues. The bank expects lower origination numbers to continue to weigh down retail banking revenues in the future. The bank also suffered from $635 million worth of incremental mortgage charge-offs required by the Office of the Comptroller of the Currency's guidance on the treatment of loans where the borrower has gone through Chapter 7 bankruptcy. Most of that was offset was a related release reserve of approximately $600 million. Despite the bank posting a somewhat disappointing performance, CEO Michael Corbat maintains Citi "performed relatively well in this challenging, uneven macro environment." "While many of the factors which influence our revenues are not within our full control, we certainly can control our costs, and I am pleased with our expense discipline and improved efficiency year-to-date," Corbat said. "With the environment remaining challenging, we will continue to focus on all aspects of our business to improve client satisfaction and shareholder results consistent with our strategy." Rounding out the big-four, Bank of America (BofA) showed healthy growth despite an expected weakening in its mortgage banking operations. According to the company's earnings release, BofA took in $2.5 billion in Q 3, a significant increase from the $340 million reported in the year-ago quarter. For the nine months ending September 30, total net income was $8 billion compared to $3.5 billion in 2012. The bank attributed its growth in part to improved credit quality and lower expenses, though those factors were partially offset by lower income from mortgage banking. BofA's Consumer Real Estate Services division reported a net loss of $1 billion, faring even worse than last year's loss of $857 million. Revenue was nearly half that of last year, falling to $1.6 billion. The bank's provision for representations and warranties was also a little higher, rising about $16 million to $323 million. BofA says it funded $24.4 billion in residential home loans and home equity loans in Q 3, helping nearly 97,000 homeowners either refinance or purchase a home through its retail channels. Approximately 78 percent of funded first mortgages were refinances, while 22 percent were for home purchases. The company's provision for credit losses on the mortgage side decreased $571 million from Q2 2012—to a provision benefit of $308 million, "due to continued improvement in portfolio trends including increased home prices and the impact of regulatory guidance in the prior-year period regarding the treatment of loans discharged from Chapter 7 bankruptcy," the bank explained to investors. Meanwhile, loan performance improved, with the number of first mortgage loans 60 or more days delinquent falling 19 percent quarter-over-quarter and 57 percent year-over-year. "This quarter, we saw good loan growth, improved credit quality and record deposit balances. Our customers and clients continue to do more business with us," said BofA CEO Brian Moynihan. "The economy and business climate will improve even more quickly as conditions normalize, and we are well positioned to benefit from that."

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