A lot of hype has built up around the idea that the U.S. Federal Reserve will begin to reduce the flow rate of asset purchases under its quantitative easing program, and all the taper talk has spooked the market. Perhaps the most obvious manifestation of changing sentiment has been in the rate on the benchmark 10-Year Treasury note, which has increased by more than 1.3 percentage points from a low of close to 1.6 percent in May.
At a glance the change may seem trivial, but before June of this year, the 10-year yield had not broken above 2.5 percent since summer of 2011. The federal funds rate has been trapped at the zero bound since 2008, and combined with aggressive QE, the Fed has broadly succeeded in driving interest rates lower. Rates have come up significantly over a short period of time and the rapid change is forcing an equally rapid re-adjustment by those who operate in the financial industry.
At the top of that pile are financial institutions with a heavy hand in the mortgage market. The average commitment rate on 30-year fixed-rate mortgages has increased by nearly a full percentage point since May when they hit historic lows. The torrent of people rushing to apply for home loans or refinance existing mortgages has rapidly diminished, and with it, the revenues that banks derived from the process.
As a result of climbing rates, mortgage applications have generally been on the decline. The latest report from the Mortgage Bankers Association showed that for the week ended August 30, applications increased 1.3 percent on a seasonally adjusted basis — the first increase in 17 weeks. The industry group’s refinance index increased 2 percent while the seasonally adjusted purchase index fell by 0.4 percent.
Overall, the refinance share of mortgage activity accounted for 61 percent of total applications, up 1 percent from its lowest level in over two years. In fact, the refinance index has crashed more than 60 percent from its peak during the week of May 3.
The increase in mortgage rates has decreased loan activity, and as a result, financial institutions involved in the business have taken a blow. Wells Fargo (NYSE:WFC) — the largest employer in the U.S. financial industry, and the bank that was responsible for as many as one in three home loans in 2012 — is reportedly laying off 20 percent of its 11,406 mortgage loan officers because of the evaporation of demand.
The bank is expecting mortgage originations to decline by as much as 29 percent in the third quarter and the gain on sale margin to decline to about 1.5 percent. Here is a slide from the bank’s presentation at the Barclays Investors Conference in New York recently.
The news follows similar announcements from financial institutions like JPMorgan (NYSE:JPM), which announced in February that it was going to lay off as many as 17,000 people in the U.S., most of them from its mortgage business. Bank of America (NYSE:BAC), which previously targeted restructuring and cost-savings layoffs of up to 30,000 people, has also made large reductions to its mortgage workforce.
Most recently, sources familiar with the plan told Bloomberg that the bank would be eliminating 2,100 jobs and closing 15 offices by the end of October. JPMorgan outlined the dramatic change in the mortgage market in its own presentation at the Barclays conference.