Mortgage lending activity was weaker than expected in the first quarter and the result is likely to be slimmer profit margins for a number of banks, according to Paul Miller, a managing director at FBR Capital Markets.

In a research note published Friday, Miller lowered his first-quarter earnings estimates for Bank of America (BAC), Fifth Third Bancorp (FITB), Flagstar Bancorp (FBC), SunTrust Banks (STI), U.S. Bancorp (USB), and Wells Fargo (WFC) to reflect a slowdown in mortgage originations when compared to the fourth quarter. Miller attributed the decline to seasonal weakness.

Still, Miller remains bullish on the long-term outlook for mortgages, noting that the Federal Housing Administration and the Department of Housing and Urban Development are pushing banks to lend to more borrowers with weak credit to spur the housing recovery.

"While we continue to favor banks with exposure to mortgage banking over the long term, we do foresee some headwinds in the space in the first quarter," Miller wrote.

Total mortgage originations were expected to drop 20% to 25% in the first quarter, to roughly $400 billion from the fourth quarter's $525 billion in originations. But Miller says the second quarter should "surprise to the upside," given that loan volumes appear to have strengthened in March.

"We continue to believe the perceived 'refinance cliff' will happen later rather than sooner, with the hopes that refinance volumes will remain elevated long enough for the [home] purchase market to continue to gain traction," Miller wrote.

Refinances have driven earnings growth at the top banks for more than two years. In the fourth quarter, mortgage lending accounted for 14% of total revenue at Wells Fargo, for example, the highest percentage in three years.

Miller lowered his first-quarter estimates for Wells by 6 cents, to 88 cents, and reduced his estimates for B of A by a penny, to 23 cents a share. He also reduced estimates at Fifth Third by 3 cents, to 36 cents; by 6 cents at SunTrust, to 63 cents; and by 3 cents at U.S. Bancorp, to 73 cents.

Miller's biggest adjustment was to Flagstar's profits, which he reduced by 36 cents, to 84 cents a share. In February the Troy, Mich., company revised its fourth-quarter earnings after it opted to set aside $161 million to cover lawsuits related to its mortgage underwriting practices. As a result of the revision, the bank reported a loss of $94.2 million for the quarter; it had reported a profit of $66.8 million.

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