Earnings reports from two major banks Friday painted a picture of a healing housing market, with more Americans taking out mortgages, paying them on time and taking advantage of low interest rates to refinance.
At JPMorgan Chase, the biggest bank in the United States, income from new home loans set a record from January through March. The bank issued 6 percent more mortgages than a year ago and got 33 percent more applications.
Wells Fargo, which issues the most home loans, booked the most mortgage fees since 2009. It issued 54 percent more mortgages than a year ago and took 84 percent more applications.
A healthier housing market is welcome news. Housing has been the biggest drag on the economic recovery, while other segments, such as manufacturing and consumer spending, have held up or grown.
Home prices are still falling, though more slowly than in the past several years, and more than half a million American homes were in the foreclosure process at the end of March, according to RealtyTrac.
Still, stronger mortgage business helped JPMorgan and Wells Fargo beat Wall Street expectations for first-quarter earnings. JPMorgan CEO Jamie Dimon boasted that the bank had originated 200,000 mortgages in the quarter.
Two key factors helped:
— The average rate on the 30-year fixed mortgage dropped to 3.87 percent in February, the lowest since long-term mortgages began in the 1950s. Rates have stayed low: This week, the average is 3.88 percent.
Wells Fargo CEO John Stumpf said the housing market is close to a "tipping point" at which it can take off.
"When you have the dynamics of higher rental rates and lower home values at great financing rates, there's a point in time where the market's going to clear and you're going to see improvement," Stumpf said.
Some markets, he said, like Texas, Northern California and Washington, D.C., have already reached that point.
— Job growth in January and February was some of the strongest since the Great Recession, and the unemployment rate has fallen to 8.2 percent, the lowest since January 2009.
At Wells Fargo, 15 percent of mortgage applications came from the government's Home Affordable Refinance Program, which helps Americans who owe more than their property is worth get more affordable loans.
"It is great to see people who have made their payments every month even though they are underwater, or hugely underwater," Stumpf said. "And now to be able to help them put a few hundred dollars extra in their pocket every month, that is terrific."
Foreclosures are still holding the housing market back. A $25 billion settlement reached in February between the nation's biggest mortgage lenders and state officials has paved the way for banks to take action on unpaid mortgages, many of which have been in a procedural limbo for months or years.
Those homes could be foreclosed on and end up back on the market. Foreclosures typically sell at a discount to other homes and can drag down the value of neighboring properties.
The banks agreed to overhaul their mortgage practices. Because of that commitment and more disciplined internal rules, banks don't make as much money as they once did on mortgage loans.
At a time when low interest rates have already reduced income for banks, banks must also assign one banker to each homeowner undergoing a loan modification and make sure every loan has double-checked documentation.
At JPMorgan, expenses related to mortgage production increased 35 percent for the quarter to $573 million. At Wells Fargo, total noninterest expenses rose slightly over the year before, mostly from commissions and bonuses for bankers in the mortgage unit and elsewhere.
Both Wells Fargo and JPMorgan also put aside more money to pay investors who allege they were misled about mortgage-backed securities that the bank sold them before the financial crisis in the fall of 2008.
Dimon said JPMorgan expects high costs from the bursting of the real estate bubble last decade "for a while longer." The bank set aside $2.5 billion to fight legal battles, including over foreclosures. Its chief financial officer said the bank has enough reserves for mortgage-related litigation. Wells Fargo added $314 million to its legal reserves.
Despite the increased costs, any growth is welcome at a time when other loans are growing at an even slower pace, says Christopher Mutascio, an analyst for the brokerage Stifel Nicolaus.
In a conference call with Wells Fargo executives, bank analyst Nancy Bush asked whether mortgage loan modifications — slashing rates, forgiving principal — would give borrowers an excuse not to meet their mortgage payments.
Stumpf said the "vast majority" of Americans want to pay their bills "if they have the income to do it." Loans today, Stumpf said, are more like those made a decade ago, with full documentation and substantial down payments.
JPMorgan Chase, the largest U.S. bank by assets, turned a $5.4 billion profit for the quarter, down 3 percent from last year but ahead of Wall Street estimates. Wells Fargo made $4 billion, up from $3.6 billion a year ago.
Large banks serve as a barometer of the economy. Citigroup, Bank of America, Goldman Sachs and Morgan Stanley report their results for the first quarter next week.