Banks cut jobs as mortgage boom ends
The trickle-down of reduced expectations for 2014 may begin soon, with homebuyers feeling an impact.
The end of a three-decade period of falling mortgage rates has slammed the brakes on a huge wave of refinancing by U.S. households. The drop-off has deprived lenders of a key source of income at a time when the growth in loans for home purchases remains weak.
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The Mortgage Bankers Association next week plans to cut its 2014 forecast for loan originations, which include loans for home purchases and refinancing. The current forecast of $1.2 trillion would represent the lowest level in 14 years. The trade group Wednesday reported that mortgage applications in the two weeks ending Jan. 3 touched a 13-year low.
Wells Fargo and JPMorgan Chase are scheduled to report fourth-quarter results next Tuesday, kicking off a wave of bank earnings reports. Analysts expect results across the sector to show that the number of loan originations for home purchases and refinances fell by 20 percent to 30 percent in the fourth quarter from the previous quarter.
In the third quarter, mortgage-banking income, which includes fees from making new loans and processing payments on existing loans, tumbled by 45 percent at 10 big banks tracked by industry publication Inside Mortgage Finance.
Already, banks across the U.S. have cut thousands of jobs in their "back office" mortgage operations to make up for the decline in refinancing activity. Wells Fargo has eliminated more than 6,200 mortgage jobs since the summer. Bank of America Corp. has said it hopes to cut about 4,000 jobs by the end of the fourth quarter. Citigroup Inc. has trimmed about 1,100 positions.
Guy Cecala, chief executive and publisher of Inside Mortgage Finance, said he thinks the job cuts could spread from back-office personnel to loan officers.
"At some point, they're going to hold [the loan officers'] feet to the fire," he said.
Heather Welch, the branch manager in Harlingen, Texas, for Premier Nationwide Lending, a mortgage lender, said her branch is resorting to cost-cutting in areas like advertising and marketing.
"We have cut basically down to the bare minimum," Welch said. "We have to be extremely careful."
The decline comes after a three-decade period in which interest rates generally fell, homeowners refinanced often and banks bulked up to meet the rising demand.
From 2000 to 2003 alone, mortgage rates fell from a peak of 8 percent to a low of 5 percent, and refinance volumes soared to $2.5 trillion in 2003, from $230 billion in 2000.
After the housing bubble burst, lending for home purchases slowed sharply. But because mortgage rates turned downward in 2009 and again in 2011, refinancing perked up, leading to a banner year in 2012.
"What we saw in 2012 was extraordinarily high profits, so we really had nowhere to go but down," Cecala said.
Now, refinancing is evaporating, said David Stevens, CEO of the Mortgage Bankers Association, and "the business is completely shifting" toward home-purchase lending as rates rise. The rate on a 30-year fixed-rate mortgage averaged 4.72 percent last week, according to the Mortgage Bankers Association, up from 3.6 percent last May.
To be sure, interest rates could drop again, which could stoke demand for refinancings. But because many borrowers already have refinanced, the pool of potential borrowers who could benefit from refinancing is dwindling.
Lou Acquista refinanced the mortgage on his 5,000-square-foot Dallas home twice after buying it in 2007. The Apple Inc. sales manager most recently refinanced in October 2010, getting a 10-year fixed-rate loan for a 3.5 percent interest rate. But that is the end of his refinancing journey, at least for the foreseeable future, he said.
"In my case, it was strictly to lower my mortgage payment," Acquista said. "I would only be interested for us to do that again if that was the case, and at this stage it does not appear there is a vehicle for me to do that."
Borrowers like Acquista are forcing bankers to adjust their tactics. For the past few years, mortgage-loan officers such as John Cannon had a simple strategy for making money: answering the phone.
Cannon, who works for Absolute Mortgage Banking, a mortgage brokerage in Palo Alto, Calif., benefited for most of his 12-year career from a strong refinancing business spurred by a seemingly endless series of interest-rate drops. New customers would seek him out when rates dropped, and drumming up business mostly meant calling old clients to see if they wanted to refinance, he said.
That changed when mortgage rates began rising last year. Cannon realized he needed to start attending open houses so he could meet real estate agents who might deliver clients looking to purchase homes, as refinancings dwindle.
"Much to my detriment, I've been a 'refi' guy pretty much my whole career," Cannon said.
The mortgage industry's last bout with surprising rate spikes came in 2003 and 2004, when a similar move threatened to derail a lending boom. Back then, banks responded by relaxing credit standards and shifting to adjustable-rate, interest-only and other types of loans that offered lower initial monthly payments. Those loans ended up backfiring on banks, borrowers and investors when home prices began falling in 2006 and helped spark the financial crisis. Lenders have shied away from such loans since.
Wells Fargo Chief Executive John Stumpf said at an investor conference in December that he thinks declining refinancing activity will refashion the industry around home purchases, with lending heating up in the spring and summer and cooling off in the winter.
"I think we're getting into a more normalized mortgage market," he said. "You'll see the cyclical aspects come back."
Such prospects are prompting some bankers to think creatively.
Joe Greiner, a mortgage banker in Dallas, said it isn't enough to have connections with real-estate agents. Greiner, who works for Real Estate Mortgage Network Inc., said it is now essential to cultivate relationships with divorce attorneys and accountants, who will know when people are looking for a home.
Divorce lawyers can often refer new clients like a husband and wife who are selling the house they share together and are looking for two new homes, for example.
"Mortgage banking has changed dramatically, because your business partners have to be different entities," he said.
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