A recent decline in mortgage applications has some mortgage analysts anticipating a new round of layoffs in the sector.
Last week’s 13.5% decline in loan applications recorded by the Mortgage Bankers Association confirmed that the two-year refinancing wave that started in 2011 is essentially over, according to Bank of America Merrill Lynch analysts.
"There may be ongoing residual efforts to get the remaining HARP-eligible borrowers refinanced but those efforts are likely to be impeded by a potentially severe contraction in mortgage banking staffing," explained BofAML mortgage-backed securities strategists Chris Flanagan and Adam Katz.
They added, "We think there is a significant chance that new lows in industry employment levels will hit over the next year and the lack of staffing will create a new negative feedback loop that further tightens mortgage credit availability."
The current actions of big banks reflect market realities as interest rates rise and refi volumes drop.
As demand for loan servicing falls and the originations market becomes purchase-heavy, banks are caught trying to build new streams of revenue while simultaneously getting rid of services now in low demand.
"As a result of higher mortgage rates and sizable declines in refinance demand, the market is going to be much smaller," explained Royal Bank of Scotland (RBS) analyst Sarah Hu.
She added, "Almost everyone in this industry is talking about how origination volumes will come down in 2013-2014. Some large banks have begun to layoff people, which is not surprising given that there’s probably less underwrites, less front-end closers and less operation staff needed in this industry in the foreseeable future."
Put simply, the reason for believing that industry employment could hit a new low for the new millennium is that mortgage application volumes stand a good chance of setting a new low in the forthcoming months, taking out the prior low set during the height of the financial crisis.
Going forward, the key question will be whether purchase mortgage application volumes can reverse or are they too far in the hole?
"Given the sharp decline in the NAR affordability index that resulted from the recent rise in mortgage rates, achieving a reversal may prove to be a tall order," BofAML analysts stated.
They added, "With refinancing business near its end and likely quickly winding down further, and purchase volume only moderately above 20-year lows, there appears to be little justification for not sharply curtailing staffing levels."