Mortgage Originations Plunges to 17-Year Low as Rates Curtail Borrowing

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The U.S. mortgage sector is going through its biggest drop down since 1997. This happens on the background of rising interest rates and home prices that have scared off lots of borrowers.

The two largest U.S. mortgage lenders Wells Fargo (WFC) & Co. and JPMorgan Chase & Co. reported a major fall in the loans volume in the first quarter of 2014. According to the Mortgage Bankers Association in Washington, $226 billion of mortgages were issued during the first three months of the year, the smallest quarterly numbers since 1997 and one third of the 2006 average.

When the Federal Reserve announced a tapering of stimulus spending in mid-2013, interest rates for mortgages increased with approximately 1%, and lending has been going down ever since. Housing prices have gone up given the over 40% increase in the all-cash purchases. Thus, lots of Americans can no longer afford to buy a house. Experts expect that the mortgage sector will continue to slide this year.

Experts warn that the intense business growth in the mortgage origination sector that lasted for a few years is no longer possible. Lenders, big and small, now have to adapt to a new reality. Banks need to make the shift to smaller and leaner operations in order to adjust to the unfolding market trends.

Up until June 2013, Wells Fargo had exceeded $100 billion in home-loan originations for seven straight quarters. But that figure is history now. The figures reported for the first three months of 2014 ($36 billion) were at an astonishingly low level as compared to the same time the previous year.

Rising Rates

Given the rising interest rates, the number of refinancing applications has dropped as well, as shown by Wells Fargo’s results. The first quarter of 2014 had just 34% of all refinancing loans, while they accounted for 69% of all originations in the same period of 2013.

As Timothy Sloan, Wells Fargo’s chief financial officer, explained, the falloff is the result of a combination of factors, including stricter standards imposed after the housing crash. Nevertheless, the current market situation cannot be called a secular shift just yet. The recovery after the housing crash has taken longer than expected, and low rates have complicated the situation even further. The market is still adapting to changes in underwriting standards and other regulatory modifications.

According to a statement from Freddie Mac, the average interest rate for a traditional 30-year fixed mortgage was 4.34%, which is 0.8% higher than the 3.54% average of 2013.

Fewer jobs in the mortgage industry

Credit standards are also getting tighter, with pressure for higher FICO scores. As shown in the Feb. 20 report by Goldman Sachs Group Inc., more than 40% of borrowers had scores over 760 in 2013 compared to 2001, when only 25% had such good credit scores.

JPMorgan faces a huge drop in the number of mortgage originations with only $17 billion of home loans in the first quarter of 2014. At the same time the year before, the New York-based bank made $52.7 billion of mortgages. This level is lower than at any time during the housing crisis. JPMorgan’s CFO blamed severe winter weather for the huge first quarter drop. Results are lower than expected for JPM and WFC. There was a material decrease of mortgage volumes and applications.

The decline in mortgage activity has led to serious staff cutting. JPMorgan announced a 30% (14,000 positions) drop in the number of jobs since the start of last year. The first quarter of 2014 brought 3,000 reductions at the New York-based bank. For the same period, Wells Fargo reported reducing the number of jobs by 1,100 in the residential mortgage business sector.

Cash Deals Take the Upper Hand

The drop in the demand for home loans made JPMorgan estimate money loss on mortgage production in 2014.

Investors dominate all-cash purchases and this causes a huge drop in the loans volume. More than 43% of U.S. home purchases in February were deals in cash. This is a 20% rise from the previous year. RealtyTrac reports that the top states with deals in cash are Florida, New York and Nevada.

Because of investors – individuals and private equity firms – bought homes in cash, the housing prices went up, affecting the mortgage industry. Experts believe that one third of that increase is explained by the impact of investors’ purchases.

Institutional Landlords

Over the last two years, real estate investment trusts, hedge funds, private-equity firms and other institutional landlords have invested more than $20 billion in the purchase of 200,000 rental homes. The context was favorable to these investors. After the 2006 peak, there was a huge 35% drop in property prices. The rental demand increased too because of the 5 million home owners who went through foreclosure after 2008. And investors took advantage of the market conditions to snap up properties.

The markets that received the hardest blow from the real estate crisis were those where investors decided to put their money (Phoenix, Atlanta, Las Vegas) and now prices are higher in those parts of the U.S. The market has gone through a reshape because of this high percentage of institutional and individual investors who have taken advantage of the market hitting bottom. Now the market is starting to rise and they reap the benefits.

The climbing home prices over the last two years have made properties less affordable. From the post-bubble low in March 2012, there has been a 23% surge in home prices.

Small Market

The National Association of Realtors reported changes in the prices for single-family homes. Prices increased in fewer areas in the fourth quarter, with 73% of U.S. urban areas experiencing gains compared with 88% in the three months before.

Given the higher values, banks will have even more difficulties in finding qualified borrowers this year. In April, JPMorgan officials expressed their hopes that the market would exceed $1 trillion for the whole year.

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