As the U.S. Federal Reserve continues to raise interest rates, analysts and economists in the United States will be monitoring to see how banks’ mortgage operations are doing during their second-quarter earnings this month. The mortgage industry is shrinking after adding tens of thousands of employees between 2018 and 2020 to manage the surge in mortgage originations and refinancings brought on by low-interest rates. According to experts and economists, U.S. banks including JPMorgan Chase & Co. (NYSE:JPM) and Wells Fargo & Co. (NYSE:WFC) have begun making staff reductions, and more industry layoffs are anticipated in the coming months. According to Doug Duncan, chief economist of Fannie Mae, which along with Freddie Mac backs many U.S. mortgages, “we’ll see the bulk of layoffs over the next month or two. “There is usually about a six-month lag between a turn in the market and layoffs.”
After the Fed raised rates by 0.75 % point in June, home loan interest rates soared to a 14-year high. According to Freddie Mac, the average rate on a 30-year fixed-rate mortgage, the most popular type of house loan in the United States, was 5.3% as of July 7 compared to 2.9% a year earlier. According to economists at Fannie Mae, the overall number of homes sold will drop by 13.5% this year, and the number of mortgage originations would drop by roughly 42% to $2.6 trillion.
BANK DOWNSIZING: JPMorgan Makes Cuts
Late last year, nonbank lenders who were primarily interested in refinancings, started to feel the impact. For instance, Better.com let go of 900 workers in December; this year, other competitor nonbank companies did the same. The larger banks are beginning to reduce their workforces as well, according to Gerard Cassidy, head of U.S. bank equity strategy at RBC Capital Markets. Given the continued pressure on the refinancing industry, we anticipate it to last the entire year. On July 14, the big American banks will begin to release their results for the traditionally American home-buying season, which runs from April to June.
According to a source with knowledge of the situation, Wells Fargo, the largest bank in the US mortgage industry, made employee reductions in April and June. According to a third person with knowledge of its plans, JPMorgan, one of the top 10 U.S. banks in terms of mortgage lending, also made personnel reductions in June. The sources balked at giving numbers. According to statistics gathered by RBC’s Cassidy, the mortgage division contributed 6% and 2% of total income at Wells Fargo and JPMorgan, respectively, last year.
Some small lenders have performed significantly worse. First Guaranty Mortgage Corp, a Texas-based mortgage provider, declared bankruptcy last month.
BRIGHT SPOTS
However, not everyone will find it unpleasant. According to a source familiar with the situation, Bank of America Corp., another significant mortgage lender, has neither slashed staff nor does it have any intentions to do so this year. In fact, according to Deutsche Bank analyst Matt O’Connor, the bank anticipates “excellent, balanced” home loan growth for 2022.
Only Bank of America among the major banks reported that first-quarter mortgage revenue increased by about 8% from the same period in 2021. Executives ascribed that to a rise in loans and a decrease in mortgage prepayments, which many customers had been doing during the pandemic.
Since Thursday is a quiet day before earnings, the banks chose not to comment. As homeowners attempt to access the equity in their homes, Cassidy predicted that the reduction in originations and refinancings will be somewhat offset by Home Equity Lines of Credit. According to Duncan of Fannie Mae, banks might potentially profit from a rise in interest in adjustable-rate mortgages, which have lower interest rates for shorter terms.
But according to Duncan, these positive signs won’t be sufficient to protect lenders against a severe collapse in the economy. If inflation reaches 10%, the bright spots will also be insufficient to stop additional rate increases, he said. “You’d expect an even greater slowdown,” he added.
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