* Two of nation's top banks post record earnings
* JPMorgan has lower 'London whale' losses than in 1st half
* Wells hurt by unexpectedly large drop in margin
By David Henry and Rick Rothacker
Oct 12 (Reuters) - Two of the nation's biggest banks, Wells Fargo & Co and J.P. Morgan Chase & Co , made record profits over the last three months from a sharp rise in mortgage lending, though performance stumbles elsewhere hurt J.P. Morgan more than Wells Fargo.
Both banks reported double-digit increases in third-quarter earnings on Friday, as record-low interest rates and an uptick in the housing market drove a boom in mortgages.
But while J.P. Morgan easily met Wall Street expectations, Wells Fargo came up weaker than expected on a key performance measure, and their shares reflected that in morning trading. J.P. Morgan shares were down 1.1 percent at $41.64 in a broadly lower market, while Wells were down 3.4 percent at $33.97.
"All in, we think it's a good quarter for (J.P. Morgan), and other banks should see some of the same benefits," Nomura Securities analyst Glenn Schorr wrote in a note to clients.
The mortgage market dragged on banks during the worst of the financial crisis but has become a bright spot of late. After the Federal Reserve said in September it would buy huge quantities of mortgage bonds every month for the foreseeable future, rates fell sharply and loan applications soared.
Reuters Insider-Dimon gets a break
Housing turns a corner
Breakingviews-Evading the London Whale ID:nL1E8LC4HS]
Graphic-JP Morgan Chase 3rd qtr earnings
Besides the good news about the housing market, J.P. Morgan also reported that losses are shrinking rapidly from the bad trades engineered by the so-called London Whale, which cost the bank almost $6 billion in the first half of the year.
The losses cast a harsh light on Jamie Dimon, the chief executive whom some saw as a potential leading candidate for U.S. Treasury secretary in a second Obama administration. He has apologized repeatedly, and at length, for failing to catch the problem before it grew so big.
The nation's largest bank by assets posted net income of $5.71 billion, or $1.40 a share, up 34 percent from a profit of $4.26 billion, or $1.02 a share, a year earlier.
Analysts on average had expected a profit of $1.24 a share, according to surveys by Thomson Reuters I/B/E/S. Barclays Capital said it was the 17th time in the last 18 quarters that the bank beat Wall Street's forecasts.
WELLS LESS STRONG
Wells Fargo, the nation's fourth-largest bank by deposits, earned $4.9 billion in the quarter, 22 percent more than a year earlier, as mortgage banking revenue jumped more than 50 percent.
Per-share earnings of 88 cents just beat the average Wall Street forecast of 87 cents, although revenue missed estimates by some $270 million.
Wells, Warren Buffett's favorite bank, emerged from the crisis as by far the largest mortgage lender in the country - some three times bigger than its closest competitor.
But where the bank stumbled was in the net interest margin, or the difference between what the bank earns on loans and pays out on deposits. That metric is crucial in the industry, and Wells Fargo's margin fell 25 basis points to 3.66 percent in the third quarter. That was a sharper drop than expected.
Keefe, Bruyette & Woods analyst Frederick Cannon, in a research report for clients, said the strength in mortgages was good but the weakness in the interest margin was more important.
(Reporting by David Henry in New York and Rick Rothacker in Charlotte, N.C.; additional reporting by Dan Wilchins and Jed Horowitz in New York; writing by Ben Berkowitz; editing by Matthew Lewis)
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