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34 | TH E M R EP O RT O R I G I NAT I O N S E R V I C I N G DATA G O V E R N M E N T S E C O N DA R Y M A R K E T ORIGINATION THE LATEST PNC Reports Declining Mortgage Performance; Wells Fargo Originations Drop PNC saw dips in retail banking earnings, mortgage loan revenues, and lower gains on residential mortgage servicing rights. P NC Financial Services Group's retail banking earnings fell over the quarter and the year due to lower gains on residential mort - gage servicing rights and lower mortgage loan revenues overall, the bank revealed in its first quarter earnings report released in April. PNC also reported lower revenue in commercial mortgage loans, which resulted in reduced corporate and institutional banking earnings as well. In total, PNC's revenue grew by $10 million, hitting $3.9 billion for the quarter. Net interest income in- creased 1 percent—up to $2.2 billion. Thanks to a five-year extension in conforming to the Volcker Rule and nearly $50 million in positive valua- tion adjustments, PNC was able to offset seasonally lower fee incomes and report only a 1 percent dip in noninterest income, which totaled $1.7 billion for the quarter. "PNC had a good start to the year," said William S. Demchak, Chairman, President, and Chief Executive Officer of PNC. "We grew loans and revenue, and we managed expenses well while con- tinuing to invest in our businesses and to enhance innovation. As we progress through 2017, we are well positioned to benefit should envi- ronmental factors, including interest rates, turn more favorable." Wells Fargo saw drops as well, with a drop in mortgage origina- tions, but a slight boost in revenue. The bank's first quarter income was $5.5 billion, in line with Q1 2016. Wells Fargo's net interest income in Q1 2017 decreased $102 million from fourth quarter 2016 to $12.3 billion, primarily due to two fewer days in the quarter. Net income was down $287 million, or 9 per - cent, from Q1 2016. "Wells Fargo continued to make meaningful progress in the first quarter in rebuilding trust with customers and other important stakeholders while producing solid financial results," said CEO Tim Sloan. "While we have more work to do, I am pleased with all we have accomplished thus far." The story was similar at JPMorgan Chase. JPMorgan Chase posted a net income of $6.4 bil - lion, slightly down from Q 4 2016's 6.7 billion. JPMorgan's mortgage department struggled as well. Mortgage banking posted a drop to $1.5 billion in income for Q1 2017 from Q 4 2016's $1.6 billion. "We are off to a good start for the year with all of our businesses performing well and building on their momentum from last year," said JPMorgan Chase Chairman and CEO Jamie Dimon. "The consumer businesses continue to grow core loans at double digits, outperform the industry in deposit growth, and we once again had very strong card sales volume growth this quarter—reflecting our commitment to providing our customers the innovative products and services they want." Spending Rises with ARM Rate Drops A report from JPMorgan links ARM interest rate resets with an uptick in credit card spending. A new JPMorgan Chase Institute report highlighted the link between interest rate changes and consumer spending for homeowners with adjustable- rate vs. fixed-rate mortgages. The study, released in April, could provide valuable insight to housing policymakers regard- ing how their actions affect the type of mortgage a homeowner chooses, as well as how they impact the consumption habits of homeowners with ARMs com- pared to those with fixed rates throughout the business cycle. From Chase's 6 million mort- gage customers, the study focused on a group of 4,321 homeowners meeting specific criteria, including having a hybrid adjustable-rate mortgage originating between 2005 and 2007 and a Chase credit card active during the prior 24 months. The predictable lower- interest rate reset at the five-year mark was both preceded and followed by an increase in con- sumer credit-card spending by the group—even exceeding their mortgage-related savings. Among the highlights of the report: • Forty-four percent of the sur- veyed homeowners experienced a large drop in their hybrid ARM payment at reset, rep- resenting more than 5 percent of their monthly income on average. • Homeowners increased their spending by 9 percent in advance of the mortgage pay- ment drop and by 15 percent afterward. That occurred in spite of the considerable decline in housing value. • They used credit card bor- rowing to finance 21 percent of their pre-reset anticipatory spending increase. Post-reset, they further increased their revolving balances. Over the full two-year period studied, the homeowners' total spend - ing increases exceeded their mortgage-related savings by 4 percent. • Homeowners applied their mortgage savings across all spending categories but primar - ily used their additional funds for home improvements, fol- lowed by healthcare, for which they may have been delaying payment. The 30-year, 5/1 ARMs origi - nated between April 2005 and December 2007 reset to a lower interest rate and mortgage pay- ment between April 2010 and December 2012 as the Federal Reserve pursued a low-interest- rate policy to reverse the econom - ic stagnation caused by the Great Recession. The same circumstances also resulted in a dramatic fall in property values. Between origina - tion and reset, median home val- ues for the homeowners surveyed fell by nearly a quarter (or about $84,000). However, the precipitous dip in home values and the accom - panying rising loan-to-value ratio did not rein in the homeowners' increased spending in response to a rise in their monthly income. The report's authors noted that a variety of factors and changing market conditions can affect the type of mortgages homeown - ers obtain, as well as how their spending habits react to interest rate fluctuations. This highlights the need for additional research to use in contemplating future hous - ing and monetary policy.