Daily Management Review

Growth Of Large Bank Mortgage Loans Being Hampered By Rising Interest Rates


Growth Of Large Bank Mortgage Loans Being Hampered By Rising Interest Rates
According to first quarter filings and experts, the future for banks' home lending portfolios is bleak, with rising interest rates scaring away would-be mortgage consumers.
According to data from the Mortgage Bankers Association, the average interest rate on a 30-year fixed-rate mortgage, the most popular home loan, climbed to 5.13 per cent in the week ending April 8, the highest since November 2018 (MBA).
That rate has risen by more than 1.5 percentage points since the beginning of the year, as the Federal Reserve of the United States has moved to tighten financial conditions in an effort to curb rising inflation.
According to MBA data and bank executives, while rate hikes are beneficial for bank earnings, the spike in borrowing costs is hurting demand for mortgage originations.
"The increase in rates negatively impacted our mortgage banking business," Wells Fargo CEO Charlie Scharf told analysts on Thursday. "The mortgage origination market experienced one of the largest quarterly declines that I can remember."
On weaker mortgage originations and lesser returns when selling such loans in the secondary market, Wells Fargo home loans decreased 33 per cent from a year ago. Mortgage banking income is expected to continue to fall in the second quarter, according to the bank's officials.
Mortgage companies fell 30 per cent at Citigroup in the first quarter of this year, while home lending net revenue fell 20 per cent at JPMorgan Chase & Co., "mostly due to decreased production revenue from lower margins and volume."
Homeowners hurried to refinance their mortgages as rates hit new lows in January, causing banks and brokers to increase capacity.
With the Fed on the verge of raising rates again, the MBA predicts a 35.5 per cent drop in overall mortgage originations this year, with a 64 per cent drop in refinancings.
"We have a classic case of a mortgage boom to bust cycle," said Gerard Cassidy, Head of U.S. Bank Equity Strategy at RBC Capital Markets. "As the rates go higher the refinancing business is cooling, which it always does, and is going to force a massive shrinkage in the mortgage banking business."
Excess capacity in the market was pressuring margins, especially on secondary market sales, according to lenders' first quarter presentations, Cassidy said, adding that the industry would likely go through a period of consolidation.
Analysts said they don't expect a replay of the crisis a decade ago, in part because lending standards are considerably stricter now, but also because a bigger share of home loans is ultimately held by institutional investors.
Furthermore, according to Ken Leon, Research Director at CFRA Research, the country's largest, most systemically problematic banks currently only account for about a third of the mortgage market.
"It's the shadow banks that dominate and are probably suffering," said Leon. In the absence of a major recession on the horizon, Leon said a mortgage crisis was not a major risk for 2022. "The real triggers there would be...unemployment and inflation continuing to outpace income."