By Dan Freed

Wells Fargo (WFC) and US Bancorp (USB) are among banks expected to benefit from a strong quarter of mortgage banking revenues, as federal stimulus and rising asset values continue to boost results.

Morgan Stanley analyst Betsy Graseck estimates mortgage revenues will rise 34% in the third quarter compared to the third quarter of 2011, though she believes it will be lower than the second quarter. She argues lower interest rates will stimulate refinancing activity. 

She also sees continued benefits from a government refinancing program known as HARP 2.0, as well as strong gains for banks on the sale of assets.

Graseck recommends SunTrust Banks (STI), Wells Fargo and US Bancorp as the best way to invest in expected strong mortgage revenues since mortgage banking makes up the largest percentage of their overall revenues.

Rochdale Securities analyst Richard Bove argues the biggest beneficiaries will be Bank of America (BAC), JPMorgan Chase (JPM), Wells Fargo and US Bancorp.

Bove argues the Federal Reserve's purchase of $40 billion worth of mortgage-backed securities will drive up MBS prices and cause money to flow into the banking system. That in turn will allow banks to originate mortgages very cheaply and sell them into the bond market at a healthy profit.

The only hitch, according to Bove, is that banks will be "hampered" in creating more new mortgages "because they have dismantled a large portion of the origination facilities that existed six years ago." That shortage of supply will allow the secondary market price of mortgages -- in other words the cost of buying them after they have been created--to remain high, Bove states in a report published Tuesday.

"Ultimately, the housing market will recover because there is pent-up demand due to population growth, the failure to replace dilapidated housing; and lower affordability costs. Following this, the economy should benefit and jobs will be created. This should work," Bove writes.

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