Here’s Who’s Really Getting Bruised By Higher Interest Rates

source: http://www.flickr.com/photos/wwworks/

source: http://www.flickr.com/photos/wwworks/

The recovering housing market has been an enormous source of revenue for Wells Fargo (NYSE:WFC). The bank became the largest mortgage lender in the United States following the financial crisis, responsible for nearly one in three home loans in 2012, beating out Bank of America (NYSE:BAC) for the top spot. Wells Fargo has originated more than $100 billion in new mortgages each quarter since the fourth quarter of 2011, and logged an average gain on sale margin of about 2.28 percent.

But after nearly two years of strong gains in its mortgage business, the tide appears to be receding. Interest rates have increased dramatically over the past few months and as a result mortgage origination and refinancing activity has generally been on the decline. The average contract interest rate for a 30-year fixed-rate mortgage edged down slightly last week from 4.80 percent to 4.75 percent, but is still well above the average commitment rate of 3.45 percent in April.

This increase in rates and the subsequent decrease in mortgage-business activity has had a material impact on payrolls at Wells Fargo. The bank, with nearly 275,000 employees, told Bloomberg on Wednesday that it would be laying off an additional 1,800 people from its mortgage origination business. The cuts are in addition to 3,000 previously announced layoffs.

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. JPMorgan announced in June that it would be eliminating about 1,800 jobs specifically from its mortgage servicing unit.

Bank of America, which previously targeted restructuring and cost-savings layoffs of up to 30,000 people, has also made large reductions to its mortgage workforce. Bank of America recently announced 2,100 additional layoffs within its mortgage servicing segment.

Higher interest rates are weighing on other facets of the real estate market as well, such as housing starts, which came in weaker-than-expected last month. Builders broke ground on houses at a seasonally adjusted annual rate of 891,000 units in August, representing a 0.9 percent rise from the downwardly revised July estimate of 883,000 units, according to the U.S. Department of Commerce. Compared to last year, overall housing starts were up 19 percent.

The results were below estimates for the fifth consecutive month. On average, economists expected overall housing starts to increase to a rate of 917,000 units. Groundbreaking on multi-family units, which have been a large driving force in housing starts as investors purchase rental units to create cash-generating investments, struggled in the wake of higher interest rates.

Here’s how JPMorgan outlined the change in interest rates in a presentation at the Barclays investors conference.

JPM

Source: JPMorgan

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