Refinancing mortgages is a phenomenally profitable and nearly risk-free business for banks, and one of the few growth sectors that were actually spawned by the Fed’s herculean efforts to force down long-term interest rates through waves of quantitative easing. Banks went on a hiring binge to shuffle all this paper around and extract fees along the way before they’d dump most of these mortgages into the lap of government-owned and bailed-out Fannie Mae and Freddie Mac. And then they’d run.
Refis accounted for up to 70% of all mortgage lending in the first half of this year. But they’ve been plunging since early May, consistently, unrelentingly, week after week. The Mortgage Bankers Association’s Refinance Index, after being down another 4.6% for the week ending August 16, reported yesterday, has swooned 62.1% from its recent peak in early May.
Mortgage rates have jumped over a full percentage point from 3.59% in early May to 4.68%, as of the week ending August 16, according to the MBA. By now, given how much Treasuries have jumped since August 16, mortgage rates have risen even further. Thus, much of the incentive to refinance a home has evaporated, especially when fees and points are taken into account.
It’s all part of the process of interest rates returning possibly to some sort of old normal as the Fed palavers more and more intensively about tapering its purchases of Mortgage Backed Securities and Treasuries. And the folks who were hired to process the tsunami of refis are now massively getting axed. Because what QE giveth, the end of QE taketh away.
The biggie: TBTF and bailed-out Wells Fargo Bank. Mortgage lending accounts for about 22% of its fee income. And in the second quarter, it produced over 20% of all residential mortgages in the US, Reuters reported, citing the industry publication Inside Mortgage Finance. In the first quarter last year, it extended $131 billion in home loans; in the second quarter this year, it only extended $112 billion. But actual home sales this year have been way ahead of last year, and purchase mortgages in the latest week still ran 5% ahead of the same week a year ago, according to the MBA (though that advance has been shriveling). The difference: plunging refis.
In response to this industry debacle, Wells Fargo is sacking 2,300 people in its mortgage business, according to an internal memo that Reuters got a hold of. That’s about 21% of the 11,000 mortgage loan officers that Wells Fargo had on its payroll at the end of March.
Franklin Codel, Wells Fargo’s head of mortgage production, wrote in the memo that mortgage refinancing has plunged to around 50% of mortgage lending, from 70% earlier this year, and would fall even further in the coming months. “We’ve had to recalibrate our business to meet customers’ needs, and to ensure we’re operating as efficiently and effectively as possible,” explained the memo in elegant corporate speak. “Unfortunately, displacements within our team are necessary.”
There had been a shot before the bow. During the July 12 earnings call, Wells Fargo CFO Tim Sloan warned that jumping mortgage rates would likely grind down that refi bonanza. For seven quarters in a row, Wells Fargo had made more than $100 billion in home loans, extracting rich fees along the way, but…. “We just don’t think that we are going to see $100 billion of mortgage volume, given the current rates today, in the third quarter,” he warned. “We will need to go ahead and make some adjustments.”
JPMorgan, during its earnings call the same day, said these rising mortgage rates could chop volume by 30% to 40%. Which would result in a “dramatic reduction in profits” in the business, explained CEO Jamie Dimon.
Now the time for these “adjustments” has come. The 2,300 people to be sacked, as interest rates head back to some sort of normal, received their 60-day notice on Wednesday, a Wells Fargo spokeswoman told Reuters.
JPMorgan and other banks will similarly decimate their mortgage divisions. And so comes to an end one of the few real economic benefits – shuffling mortgage paper around to extract fees – from the Fed’s $3-trillion bond-buying binge and zero-interest rate policy.
Printing money and forcing interest rates to near zero, that’s how the Fed and other central banks papered over the Financial Crisis, duct-taped the bursting credit bubble back together, inflated new asset bubbles, and propped up TBTF banks, like Wells Fargo. It accomplished a huge feat: a worldwide tsunami of hot money. Which is now receding. Read…. When “QE Infinity” Turns Into A Pipedream: Hot Money Evaporates, Rout Follows – See Emerging Markets