Following is a noteworthy piece published in The Wall Street Journal yesterday with additional commentary from attorney Scott Weitz.
A rise in interest rates is slamming homeowners’ demand for mortgages, prompting large and midsize banks to cut jobs and warn investors of declining profitability in the home-loan business.
Exactly as we predicted -- see previous post here.
— Scott Weitz
Wells Fargo & Co., the nation’s largest mortgage company by loan value, on Monday told investors at a conference that it expects mortgage originations to drop nearly 30% in the third quarter to roughly $80 billion, down from $112 billion in the second quarter.
J.P. Morgan Chase & Co., the largest U.S. bank as measured by assets, said during the conference sponsored by Barclays PLC that it expects to lose money on its mortgage-origination business in the second half of the year. On Aug. 29, Bank of America Corp., notified about 2,100 employees that they were being let go largely due to a decline in refinancing activity, said a bank spokesman.
Mortgage originations include loans for home purchases and refinancings.
Rates are rising on investor worries the Federal Reserve soon will take steps toward reducing an $85-billion-a-month bond-buying program designed to help stimulate the economy.
The average rate on a 30-year fixed-rate mortgage stood at 4.73% for the week ended Aug. 30, up from 3.60% at the end of April, according to the Mortgage Bankers Association.
As discussed, that is a huge drop in purchasing power. For example, it would cost over $5000 per year more for a $500,000 mortgage.
— Scott Weitz
“Rate volatility is the enemy of mortgage banking,” wrote Paul Miller, an analyst at FBR Capital Markets & Co. in a research report published Monday. Given the recent jump in mortgage rates, “we expect third-quarter results to be relatively weak for mortgage-centric companies.”
All told, Mr. Miller expects lenders to originate $1.654 trillion of mortgages this year, down from $1.75 trillion in 2012. The decline is expected to bottom at $1.46 trillion in 2014 before rising again in 2015, according to FBR estimates.
The slowdown is the latest hurdle for the banking industry, which already is grappling with tepid loan demand from corporate borrowers and higher compliance costs as regulators crack down on a broad swath of banking practices.
The warnings come even though the U.S. housing market is posting its strongest year-over-year gains since the tail end of the real-estate boom in 2006. Many lenders had ramped up their mortgage businesses in the past two years to take advantage of a surge in refinancing activity that was spurred by historically low rates.
Ultimately, big banks should benefit as they will be able to raise interest rates on new loans. That will widen the gap between their cost of borrowing and the income they earn from lending. But that won’t happen for several months, as banks work through pending applications and loans.
“We are bullish on the long term, but the short term is going to be rocky,” said Mr. Miller.
Michael Kafka, a broker at New York-based Douglas Elliman Real Estate, said he has two clients who are waiting for final approval from their co-op and are concerned about closing quickly to avoid higher interest rates.
“They are nervous about their rate locks expiring before they can close,” he said.
San Francisco-based Wells Fargo, which financed nearly one in four U.S. mortgages in the second quarter, has already cut 3,000 jobs in the mortgage business since July. The reductions represent roughly 1% of the bank’s total workforce.
The bank will “continue to make adjustments in the current environment,” said Tim Sloan, chief financial officer of Wells Fargo, during the banking-industry conference.
At J.P. Morgan, mortgage originations are on pace to drop as much as 40% from the first half of 2013, said Marianne Lake, J.P. Morgan’s chief financial officer, at the conference. She attributed the decline to a drop in refinancings. She said refinance applications are down more than 60% from the peak in May 2013.
Mortgage-banking income dropped 3% at Wells Fargo and 14% at J.P. Morgan in the second quarter from a year earlier. At Bank of America, the decline was 22% from the year-ago period.
The mortgage slump also is taking a toll on smaller lenders, some of which pumped up their home-loan business to help offset a slowdown in commercial lending.
M&T Bank Corp. Chief Financial Officer Rene Jones on Monday told investors that they should brace for a “significant” decline in mortgage-banking volumes in the third quarter, noting that analyst projections for the industry have been a “little rosier than we would have expected” given the environment.
The Buffalo, N.Y. lender racked up $91.3 million in mortgage-banking revenue in the second quarter, up roughly 30% from the same period in 2012.
The slowdown is perplexing to industry veterans like Gerald Lipkin, who has been chief executive of New Jersey lender Valley National Bancorp since 1989.
Mortgage volumes are “way down” at the bank even though Valley already has switched its focus away from refinancing deals to new home loans, he said. Mortgages represent roughly 20% of Valley’s loan portfolio.
Mr. Lipkin said rates are still at historically low levels despite the recent increase.
“I remember when mortgage rates were 14% and if you got a loan at 12%, everyone thought it was terrific,” he said.
In a stock market that moved broadly higher Monday, Wells Fargo’s shares rose 29 cents, or 0.7%, to $41.72, J.P. Morgan Chase gained 30 cents, or 0.6%, to %52.86, and Bank of America added 12 cents, or 0.8% to $14.48.
As discussed, this is a very large issue that few are talking about. We believe it will take a toll in the real estate market and is reflected with recent King County numbers -- inventory of properties for sale continues to increase, while actual sales continue to decrease.
— Scott Weitz
The original article, authored by The Wall Street Journal staff reporters Robin Sidel and Shayndi Raice, can be found at www.wsj.com.