Big banks face lending environment aftershock

Higher interest rates force institutions to cut mortgage business

With mortgage purchases and refinance volumes on a steep slope, mega banks continue to pull out of the mortgage finance space.

Mortgage application fillings are continuing to tumble, falling 13.5% from last week, coupled with the refinance share of mortgage activity dropping 20% from the same time period.

Big banks are feeling the aftershock of the dynamic shift in the lending environment, with many of the heavy hitters — Wells Fargo (WFC), Bank of America (BAC) and SunTrust (STI) — cutting hundreds to thousands of mortgage-related positions.

JPMorgan Chase (JPM) chief financial officer Marianne Lake presented at a U.S. financial services investor conference this week and noted that the mortgage market volume reduction has been "dramatic and rapid."

Primary and secondary mortgage rates have increased more than 100-basis points since the lows in the second quarter of 2013, driving more than 60% reduction in market refinance applications relative to peak levels in May.

Consequently, Lake expects originations to be down between 30% and 40% for the second half of the year when compared to the first half of the year.

The bank is experiencing medium-term profitability challenges due to lost revenue from refinance volumes. Purchase volumes are expected to increase, but not enough to replace lost refinance volume.

Additionally, compression on revenue margins is challenging profitability due to competitive pressure and a change in higher secondary rates.

Furthermore, negative operating leverage is impacting the bank’s lending sector because adjusting capacity of the business will take time and address fixed costs may tax longer, Lake pointed out.

An increase in rates has reduced the remaining refinance opportunity by roughly 50%, but home price index improvements may increase the eligible population of homeowners over time.

In March, JPMorgan Chase mortgage banking CEO Kevin Waters told HousingWire that the company was confident in the mortgage business and the lender was going to continue to invest in the market.

"From an origination standpoint, we launched a new loan origination system that will be in pilot through the beginning of the first quarter and will be rolled out through the balance of 2013," Waters explained.

He continued, "We continue to add mortgage bankers to our origination business."

However, a lot has changed since the beginning of the year and the need for servicing loans continues to dwindle.

As a result, JPMorgan Chase was in the midst of enacting major servicing cuts in August, reducing its mortgage staffing levels by 13,000 to 15,000 over the course of the next year.

With big banks scaling back mortgage business, community banks are taking advantage of the changing environment, entering the mortgage origination business to generate loan volume and more free revenue, explained Office of the Comptroller of the Currency deputy comptroller for credit and market risk Darrin Benhart.

"Banks are strategically exiting or reducing their servicing businesses in response to heightened compliance expectations and earning considerations," Benhart stated.

He concluded, "While trends in originations have improved since the crisis, originations are refinancing have begun to slow as key mortgage rates have ticked upward. The condition of mortgage lending is a mixed bag: improvements in first lien performance, some growth on the horizon, but significant headwinds from growing risk associated with junior liens, elevated delinquencies and higher interest rates."

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