Citigroup (NYSE:C) is reportedly laying off as many as 2,200 people in its mortgage origination and refinancing business. The bank — the fifth-largest mortgage originator in the U.S. in 2012 — joins the ranks of Wells Fargo (NYSE:WFC), JPMorgan (NYSE:JPM), and Bank of America (NYSE:BAC), who have all been forced to downsize their mortgage businesses.
The reason for the mass layoffs can pretty much be traced directly to the recent surge in interest rates. 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, the 10-year yield had not broken above 2.5 percent since summer 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 readjustment 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 one 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 Mortgage Bankers Association reported that loan applications for the week ended September 6 were down by 13.5 percent on a seasonally adjusted basis. This marks the 15th decline in 18 weeks.
The industry group’s refinance index plunged 20 percent, while the seasonally adjusted purchase index fell by 3 percent. Overall, the refinance share of mortgage activity accounted for 57 percent of total applications, down 4 percent from a week earlier and its lowest level since April 2010. In fact, the refinance index crashed 71 percent from its peak during the week of May 3 to hit its lowest level since June 2009.
What all this translates into is less business for mortgage bankers. Wells Fargo, as the largest originator in the U.S., has been particularly hard hit.
Wells Fargo is reportedly laying off up to 20 percent of its 11,406 mortgage loan officers. 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. Below is a slide from the bank’s presentation at the recent Barclays Investors Conference in New York.
Not only have originations been on the decline, but the bank’s gain on sale margin — what it earns from selling the loan to someone who will securitize it, like Fannie Mae or Freddie Mac — has also been declining. The bank expects a gain on sale margin of just 1.5 percent in the coming quarter.
While the increase in rates may become a headwind for Wells Fargo, Chief Financial Officer Tim Sloan does not expect it to kill the housing recovery. According to Bloomberg, Sloan said: “We don’t believe that the recent increases in mortgage rates are going to in any way, shape or form snuff out the housing recovery. When you look at any sort of statistics in the demographics in terms of household creation as well as household affordability, they are still very attractive and should drive a continued recovery in the housing business.”
Sloan echoed comments made by Lawrence Yun, the National Association of Realtors’s chief economist, who believes that a pullback in pending home sales is nothing to panic about. He said in a press release, “The modest decline in sales is not yet concerning, and contract activity remains elevated, with the South and Midwest showing no measurable slowdown.”
The Pending Home Sales Index, a forward-looking indicator based on contract signings, fell 1.3 percent to 109.5 in July compared to 110.9 in June, according to the National Association of Realtors. After posting its strongest pace since 2006 in May, the index has now declined for two consecutive months.
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