UPDATE: J.P. Morgan, Wells Fargo 1Q Results Suggest Mortgages Are On Mend

After years of dire straits in the aftermath of the U.S. real-estate collapse, the mortgage business is showing signs of life again.

In the kick-off to a week of first-quarter bank earnings reports, results from two industry heavyweights--J.P. Morgan Chase & Co. (JPM) and Wells Fargo & Co. (WFC)--showed strong gains in their mortgage lines.

Wells Fargo reported a 42% increase in income from its mortgage-banking business, to $2.87 billion from $2.02 billion in the year-ago quarter. At J.P. Morgan, mortgage profits swung to a $461 million gain in the quarter, from a $1.1 billion loss last year. The bank's mortgage revenue rose 80%, to $1.6 billion.

Chief executives of both banks said Friday that they believed the mortgage market was finally turning around.

"On the housing side, we're seeing improvement, and we've been seeing that for some time," Wells CEO John Stumpf said during a conference call with analysts. "When you have the dynamics of higher rental rates and lower home values at attractive financing rates, there's a point in time where the market is going to clear. I think we're getting very close to that tipping point."

Said J.P. Morgan CEO Jamie Dimon: "We think housing is getting very close to the bottom."

J.P. Morgan shares closed $1.63 lower, or 3.6%, at $43.21. Wells Fargo shares closed down $1.18, or 3.5%, at $32.84. Year-to-date, J.P. Morgan's stock is up 30% and Wells Fargo shares are up 19.2%.

"Mortgage credit trends improved slightly as delinquency and net charge-off trends modestly improved from last quarter," Keefe, Bruyette & Woods said in a note on J.P. Morgan's results, though it cautioned that charge-offs remain high.

The two banks' results track with industry data. Evercore Partners noted March foreclosure filings were down 3.9% from the prior month and 17.1% year-over-year, citing RealtyTrac, and that the four-week average of an index tracking purchase applications increased for the fifth consecutive time, by 2.2%. "Mortgage banking (is) poised for a blowout quarter," Jeffries said in a note.

Other bank figures also suggested mortgages are on the mend. J.P. Morgan's mortgage-application volume rose 33%, and originations rose 6% to $38.4 billion. The bank's net charge-offs declined across all prime, sub-prime and home-equity home-lending lines, and its allowance for loan losses declined by $1 billion.

At Wells Fargo, originations rose to $129 billion, from $120 billion in the fourth quarter of last year. Meanwhile, credit quality improved, with net charge-offs for consumer real-estate loans declining to $791 million, or 1.39% of average loans on an annualized basis, from $844 million, or 1.46% in the prior quarter.

Some weaknesses persist. Based on regulatory guidance, J.P. Morgan moved $1.6 billion in second mortgages to its non-performing loan book. Though nearly all the loans are current, they are loans on homes where the first mortgage is delinquent. "We're reserving those because we know they're going to go bad," Dimon said.

Wells Fargo also reclassified $1.7 billion of performing junior liens to non-performing status.

It also set aside $2.5 billion in litigation reserves for anticipated costs related to legal settlements over past mortgage practices, far more than previously.

Executives cautioned that recent high margins on mortgages are likely to decline in the future. In addition, at least some of the increased volume may be due to re-financings, rather than new business.

At Wells Fargo, the bank increased its set-aside of funds for losses on mortgages it must repurchase to $430 million, from $404 million in the previous quarter.

-By Christian Berthelsen, Dow Jones Newswires; 212-416-2381; [e-mail]

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