Mortgage lenders including Wells Fargo & Co. and JPMorgan Chase & Co. that feasted on refinancings as interest rates reached all-time lows are now warning that the drop in demand may be steeper than expected.
Even Bank of America Corp., which fell to fourth in U.S. mortgages last year as it scaled back after buying Countrywide Financial Corp., is reducing capacity further as surging interest rates crimp demand. The Charlotte, North Carolina-based firm is eliminating 2,100 jobs and closing 16 offices by Oct. 31, said two people with direct knowledge of the plan.
Home lenders are tempering forecasts after interest rates rose amid signs the Federal Reserve may scale back stimulus efforts. Wells Fargo, the top U.S. home lender, said yesterday that third-quarter originations may fall 29 percent to $80 billion. JPMorgan, ranked No. 2, said it expects to lose money on home lending in the second half as volumes drop as much 40 percent from the year’s first six months.
“There was speculation, I’m sure by Wells but a lot of other people, that there would be second-quarter momentum that would carry through to the third quarter,” said Guy Cecala, publisher of Inside Mortgage Finance in Bethesda, Maryland. Yesterday’s comments and Bank of America’s job cuts show “that some of that stuff appeared very quickly in terms of people dropping out of the market. That clearly doesn’t bode well.”
Interest rates climbed after Fed Chairman Ben S. Bernanke told Congress on May 22 that the central bank may scale back the pace of its $85 billion of monthly purchases of mortgage bonds and Treasuries if the U.S. economy shows sustained improvement. The cost of a 30-year fixed home loan rose to 4.57 percent last week from 3.35 percent in May.
Wells Fargo Chief Financial Officer Tim Sloan’s forecast for $80 billion in originations was darker than his July prediction that the San Francisco-based firm wouldn’t post an eighth straight quarter of $100 billion or more.
The lender’s gain-on-sale margin, what it gets from selling loans to be packaged into securities and sold to investors, will narrow to about 1.5 percent in the quarter, he said yesterday at an investor conference in New York. That would be the lowest since 2011’s third quarter, when it was 1.34 percent, the presentation showed.
An increase in lending for home purchases won’t be enough to replace a drop in refinancings, JPMorgan’s chief financial officer, Marianne Lake, said in her presentation. The bank’s pretax-profit margins and income on mortgage lending will be “slightly negative” in the third and fourth quarters.
“Although this may have happened sooner than we had expected, we did contemplate a more normal rate environment in our longer-term targets,” she said.