U.S. mortgage lending is contracting to levels not seen since 1997 — the year Tiger Woods won his first of four Masters championships — as rising interest rates and home prices drive away borrowers.
Wells Fargo & Co. and JPMorgan Chase & Co., the two largest U.S.
mortgage lenders, reported a first-quarter plunge in loan volumes
that’s part of an industry-wide drop off. Lenders made $226 billion of
mortgages in the period, the smallest quarterly amount since 1997 and
less than one-third of the 2006 average, according to the Mortgage
Bankers Association in Washington.
Lending has been tumbling since mid-2013 when mortgage rates jumped
about a percentage point after the Federal Reserve said it might taper
stimulus spending. A surge in all-cash purchases to more than 40 percent
has kept housing prices rising, squeezing more Americans out of the
market. That will help push lending down further this year, according to
“Banks large and small are going to have to adapt to a new reality
because mortgage origination volumes going forward aren’t going to
support the big businesses they’ve had in place for the last few years,”
said Stephen Stanley, chief economist at Pierpont Securities LLC in
Stamford, Connecticut. “They’re going to have smaller, leaner
operations, and we’re seeing them make that shift.”
At Wells Fargo, home-loan originations exceeded $100 billion for seven
straight quarters, ending in June 2013. The figure plunged to $36
billion in the three months through March, the San Francisco-based bank
said April 11.
Wells Fargo’s results show the shift in the housing market away from
refinancings as interest rates climb. Just 34 percent of its
originations went to customers refinancing loans, compared with 69
percent in the same period of 2013.
Timothy Sloan, Wells Fargo’s chief financial officer, said a combination
of forces, including tougher standards following the housing crash,
account for the falloff in lending.
“It’s too early to call it a secular shift,” Sloan said in an interview.
“This recovery has just been more complicated because of the impact of
rates being low, and now they are backing up a little bit. We’ve had a
lot of regulatory changes, we’ve had a change in underwriting standards
that the market is getting used to.”
The average interest rate for a 30-year fixed mortgage was 4.34 percent
last week, up from 3.54 percent a year ago, according to a statement
from Freddie Mac.
Lenders also are tightening credit standards, requiring higher FICO
scores. More than 40 percent of borrowers in 2013 had scores above 760,
compared with about 25 percent in 2001, according to a Feb. 20 report by
Goldman Sachs Group Inc. analysts Hui Shan and Eli Hackel.
JPMorgan originated $17 billion of home loans in the first quarter of
2014, lower than at any time during the housing crash. The New
York-based bank made $52.7 billion of mortgages a year earlier. Marianne
Lake, JPMorgan’s CFO, cited severe winter weather as among the reasons
for the first-quarter drop.
“We view JPM and WFC’s mortgage banking results as lower than expected,”
Keefe, Bruyette & Woods analysts led by Frederick Cannon said
Friday in a research note, referring to the bank’s stock symbols.
“Mortgage volumes and applications were down materially.”
The lenders are cutting staff in the slump. JPMorgan said it reduced the
number of jobs at its mortgage unit by 30 percent, or 14,000 positions,
since the start of last year. That includes 3,000 reductions in the
first quarter. Wells Fargo said it got rid of 1,100 jobs in its
residential mortgage business in the first period.
JPMorgan projected on April 11 that it will lose money on mortgage production this year because of the drop in demand.
All-cash purchases, dominated by investors, are surging as lending
drops. Deals in cash accounted for more than 43 percent of U.S.
residential sales in February, up from 20 percent a year earlier, with
the most in Florida, New York and Nevada, according to data firm
Wells Fargo said last week that it’s seeing more cash buyers in the housing market.
“Some of those cash buyers were investors, both individuals and private
equity firms and the like, and that had an impact on home prices,” Wells
Fargo’s Sloan said. “If you look at the year-over-year increase in home
prices being in the low teens, our folks think probably a third of that
increase was due to the impact of investors as buyers.”
Private-equity firms, hedge funds, real estate investment trusts and
other institutional landlords have spent more than $20 billion to buy as
many as 200,000 rental homes in the last two years. They snapped up
properties after prices fell as much as 35 percent from the 2006 peak
and rental demand rose from the almost 5 million owners who went through
foreclosure since 2008.
Investors focused on the markets hardest hit by the real estate crash,
including Phoenix, Las Vegas and Atlanta, and have helped push prices
higher in those areas.
“This is an investor-heavy market recovery,” said Daren Blomquist, vice
president of RealtyTrac in Irvine, California. “We’ve seen a relatively
high percentage of institutional investors as one segment, and regular
mom-and-pop investors as another, jumping back in as they see the market
hit bottom and start to rise.”
Home prices have surged 23 percent since a post-bubble low in March
2012, according to the S&P/Case-Shiller index. The gains have
slowed as climbing values in the past two years started to reduce
Prices for single-family homes rose in fewer areas in the fourth
quarter, with 73 percent of U.S. cities experiencing gains compared with
88 percent in the previous three months, according to the National
Association of Realtors.
Higher values will make it harder for banks to find qualified borrowers this year.
“We’re going to have a small market,” JPMorgan’s Lake said on an April
11 conference call. “ We’d be hopeful that the market would be above $1
trillion for the whole year.”
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