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Citigroup prepares for refi burnout

Analyst expects mortgage volume decline to shake 3Q earnings

cement cracked

As investors anticipate the release of Citigroup's (C) third-quarter earnings, analysts are predicting declining mortgage lending activity for the bank.

Citigroup shares have come under pressure recently, from rising credit costs, falling mortgage refinance volumes and the government shutdown.

"The bank has cut back the size of its mortgage originations, particularly since the mortgage business almost caused the elimination of Citigroup," explained Rafferty Capital Markets equity research analyst Richard Bove.

He added, "I believe that Citi results will mirror those of JPMorgan Chase and Wells Fargo. The bank is not as important of a factor in the mortgage markets, so I do not expect to see it perform better than its peers."

Banking institutions are posting weaker mortgage origination demand, leaving them no choice but to take a beating thanks to falling refinancing activity.

While JPMorgan Chase (JPM) posted an increase of mortgage banking income to $705 million in the third quarter, originations dropped 14% from a year earlier.

Additionally, Wells Fargo (WFC) saw its residential mortgage origination volumes fall from $112 billion to $80 billion during the quarter.

The rapid tapering of refinance demand is due to sharp increases in mortgage rates, forcing the market to shrink and ultimately leading the market to believe that the refi boom has finally come to an end.

As a result, many banks are cutting mortgage staff as refi volumes continue to tumble — Citigroup is no exception.

In September, CitiMortgage announced the elimination of 1,000 positions in underwriting and mortgage-default operations, explained Citigroup spokesperson Mark Rodgers.

"While difficult, these actions reflect our ongoing efforts to increase operational efficiency, adapt to changes in the marketplace, and position the business for the future," Rodgers said.

In the second quarter, Citibank posted a gain of $180 million from the sale of a mortgage portfolio.

However, the banking giant noted retail banking revenues will be negatively hit by lower mortgage origination revenue and spread compression.

Recently, Bove explained that although a refi burnout is happening, it’s occurring at time when the housing market continues to remain robust.

Consequently, by the end of the year, growth in the purchase market will surpass activity associated with home refinancings.

"In 2014, there will be an increase in the purchase market," Bove concluded.

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