Lending Drops to 17-Year Low as Rates Curb Borrowing
Mortgage lending is contracting to levels not seen since 1997 as rising interest rates and home prices drive away borrowers.
Wells Fargo & Co. and JPMorgan Chase & Co., the two largest U.S. mortgage lenders, reported a first-quarter plunge in loan volumes that's part of an industrywide drop off. Lenders made $226 billion of mortgages in the period, the smallest quarterly amount since 1997 and less than one-third of the 2006 average, according to the Mortgage Bankers Association in Washington.
Lending has been tumbling since mid-2013 when mortgage rates jumped about a percentage point after the Federal Reserve said it might taper stimulus spending. A surge in all-cash purchases to more than 40% has kept housing prices rising, squeezing more Americans out of the market. That will help push lending down further this year, according to the association.
"Banks large and small are going to have to adapt to a new reality because mortgage origination volumes going forward aren't going to support the big businesses they've had in place for the last few years," said Stephen Stanley, chief economist at Pierpont Securities LLC in Stamford, Conn. "They're going to have smaller, leaner operations, and we're seeing them make that shift."
At Wells Fargo, home-loan originations exceeded $100 billion for seven straight quarters, ending in June 2013. The figure plunged to $36 billion in the three months through March, the San Francisco-based bank said April 11.
Wells Fargo's results show the shift in the housing market away from refinancings as interest rates climb. Just 34% of its originations went to customers refinancing loans, compared with 69% in the same period of 2013.
Timothy Sloan, Wells Fargo's chief financial officer, said a combination of forces, including tougher standards following the housing crash, account for the falloff in lending.
"It's too early to call it a secular shift," Sloan said in an interview. "This recovery has just been more complicated because of the impact of rates being low, and now they are backing up a little bit. We've had a lot of regulatory changes, we've had a change in underwriting standards that the market is getting used to."
The average interest rate for a 30-year fixed mortgage was 4.34% last week, up from 3.54% a year ago, according to a statement from Freddie Mac.
Lenders also are tightening credit standards, requiring higher FICO scores. More than 40% of borrowers in 2013 had scores above 760, compared with about 25% in 2001, according to a Feb. 20 report by Goldman Sachs Group Inc. analysts Hui Shan and Eli Hackel.
JPMorgan originated $17 billion of home loans in the first quarter of 2014, lower than at any time during the housing crash. The New York-based bank made $52.7 billion of mortgages a year earlier. Marianne Lake, JPMorgan's CFO, cited severe winter weather as among the reasons for the first-quarter drop.
"We view JPM and WFC's mortgage banking results as lower than expected," Keefe, Bruyette & Woods analysts led by Frederick Cannon said Friday in a research note, referring to the bank's stock symbols. "Mortgage volumes and applications were down materially."
The lenders are cutting staff in the slump. JPMorgan said it reduced the number of jobs at its mortgage unit by 30%, or 14,000 positions, since the start of last year. That includes 3,000 reductions in the first quarter. Wells Fargo said it got rid of 1,100 jobs in its residential mortgage business in the first period.
JPMorgan projected on April 11 that it will lose money on mortgage production this year because of the drop in demand.
All-cash purchases, dominated by investors, are surging as lending drops. Deals in cash accounted for more than 43% of U.S. residential sales in February, up from 20% a year earlier, with the most in Florida, New York and Nevada, according to data firm RealtyTrac.
Wells Fargo said last week that it's seeing more cash buyers in the housing market.
"Some of those cash buyers were investors, both individuals and private equity firms and the like, and that had an impact on home prices," Wells Fargo's Sloan said. "If you look at the year-over-year increase in home prices being in the low teens, our folks think probably a third of that increase was due to the impact of investors as buyers."
Private-equity firms, hedge funds, real estate investment trusts and other institutional landlords have spent more than $20 billion to buy as many as 200,000 rental homes in the last two years. They snapped up properties after prices fell as much as 35% from the 2006 peak and rental demand rose from the almost 5 million owners who went through foreclosure since 2008.
Investors focused on the markets hardest hit by the real estate crash, including Phoenix, Las Vegas and Atlanta, and have helped push prices higher in those areas.
"This is an investor-heavy market recovery," said Daren Blomquist, vice president of RealtyTrac in Irvine, Calif. "We've seen a relatively high percentage of institutional investors as one segment, and regular mom-and-pop investors as another, jumping back in as they see the market hit bottom and start to rise."
Home prices have surged 23% since a post-bubble low in March 2012, according to the S&P/Case-Shiller index. The gains have slowed as climbing values in the past two years started to reduce affordability.
Prices for single-family homes rose in fewer areas in the fourth quarter, with 73% of U.S. cities experiencing gains compared with 88% in the previous three months, according to the National Association of Realtors.
Higher values will make it harder for banks to find qualified borrowers this year.
"We're going to have a small market," JPMorgan's Lake said on an April 11 conference call. "We'd be hopeful that the market would be above $1 trillion for the whole year."