Will Slowing Mortgage Volumes Hurt Bank Stocks?

One of the biggest factors spurring profits at many of the nation's largest banks appears to be under threat.

At a conference today, the CFO of Wells Fargo (NYSE: WFC  ) , Tim Sloan, noted that domestic mortgage lending will likely decline in the quarters ahead as demand for refinancing tapers off and isn't replaced by purchase-money originations.

Thanks to the Federal Reserve's most recent round of quantitative easing, the interest rates on mortgages are at historic lows, fueling record home loan volumes at a handful of the nation's largest banks.

In the fourth quarter of last year alone, Wells Fargo, the nation's largest mortgage originator, underwrote a staggering $125 billion in home loans. It was followed up in this regard by JPMorgan Chase (NYSE: JPM  ) at $51 billion, Bank of America (NYSE: BAC  ) at $23 billion, US Bancorp (NYSE: USB  ) at $22 billion, and Citigroup (NYSE: C  ) at $17 billion.

Sources: Company filings.

Across the industry, the vast majority of this volume was tied to refinancing as opposed to mortgages attained to purchase new homes. According to the Mortgage Bankers Association, the refinance share of mortgage activity last week came in at 78%. In Wells Fargo's case, 72% of mortgage applications received in the fourth quarter of last year were related to the resetting of existing mortgages as opposed to new ones.

Data released by the MBA this morning added substance to Sloan's comments. The trade organization's Market Composite Index suggested that total mortgage applications decreased by 6.4% last week compared to the preceding week. Likely contributing to this was an upward movement in interest rates, as the average rate for 30-year fixed-rate mortgages with conforming loan balances increased to 3.73% from 3.67% over the same time period.

What's this mean for banks?
The obvious answer is that it means less fee income for banks from mortgage lending. On the other hand, any upward movement in interest rates will translate into higher interest rate spreads which will fuel net interest income. The lesson, in turn, is one I've discussed before: when investing in banks, it's prudent to choose institutions that have a healthy mix of both interest and noninterest income.

Want to learn more about Wells Fargo?
Wells Fargo's dedication to solid, conservative banking helped it vastly outperform its peers during the financial meltdown. Today, Wells is the same great bank as ever, but with its stock trading at a premium to the rest of the industry, is there still room to buy, or is it time to cash in your gains? To help figure out whether Wells Fargo is a buy today, I invite you to download our premium research report from one of The Motley Fool's top banking analysts. Click here now for instant access to this in-depth take on Wells Fargo.