As the United States Federal Reserve continues to raise interest rates, analysts and economists will be watching how banks’ mortgage businesses perform during their second-quarter earnings this month.

The mortgage industry is downsizing after adding tens of thousands of workers between 2018 and 2020 to manage surges in mortgage originations and refinancings spurred by low interest rates. Analysts and economists predict that further layoffs in the banking industry, notably JPMorgan Chase & Co and Wells Fargo & Co, will occur in the coming months.

“Over the next month or two we’ll see the bulk of layoffs,” said Doug Duncan, chief economist at Fannie Mae, which, along with Freddie Mac, backs many U.S. mortgages. “There is usually about a six-month lag between a turn in the market and layoffs.”

After the Fed raised rates by 0.75 percentage point in June, home loan interest rates reached a 14-year high. According to Freddie Mac, the average rate on a 30-year fixed-rate mortgage, the most common type of house loan in the United States, was 5.3 per cent as of July 7, up from 2.9 per cent a year ago.

According to Fannie Mae experts, overall house sales will plummet 13.5 per cent this year, and mortgage originations will fall nearly 42 per cent to $2.6 trillion.

On July 14, major US banks will begin reporting earnings for the months of April through June, historically the home-buying season in the United States.

The suffering in the business began late last year among nonbank lenders focusing on refinancings. Better.com, for example, lay off 900 workers in December, and numerous nonbank competitors have followed suit this year.

According to Gerard Cassidy, head of US bank equities strategy at RBC Capital Markets, the larger banks are also beginning to reduce. “We expect it to continue throughout the year as the refinancing business remains quite challenging.”

According to one individual with knowledge of the situation, Wells Fargo, the largest bank in the mortgage industry in the United States, slashed workers between April and June. JPMorgan, one of the top ten mortgage lenders in the United States, reduced workers in June, according to a different individual familiar with the company’s intentions. Sources refused to share statistics.

According to figures collated by RBC’s Cassidy, the mortgage industry contributed for 6 per cent and 2 per cent of total income at Wells Fargo and JPMorgan, respectively, last year.

Wells Fargo reported a 33 per cent year-on-year fall in mortgage revenue in the first quarter, while JPMorgan recorded a 20 per cent decline in home lending net revenue. This downward trend is projected to continue in the second quarter.

Wells Fargo officials announced in June at two banking conferences that they intend to reduce their mortgage business and that investors should expect second-quarter mortgage income to be 50 per cent lower than in the first quarter.

If interest rates continue high and property sales slow further, Cassidy warned in a letter published Tuesday that some bank downsizing could result in one-time penalties later this year.

Some small lenders fared even worse. Last month, Texas-based mortgage firm First Guaranty Mortgage Corp declared bankruptcy.

However, it is not harmful to everyone.

Another significant mortgage lender, Bank of America Corp, has not eliminated workers and has no plans to do so this year, according to a source familiar with the situation. According to Deutsche Firm analyst Matt O’Connor, the bank predicts “strong, balanced” home loan growth in 2022.

Bank of America was the only major bank to report that company-wide mortgage income increased by about 8% in the first quarter of this year compared to the same period in 2021. Executives attributed the increase to loan growth and fewer clients prepaying their mortgages, which many did during the pandemic.

Because it is pre-earnings season, the banks declined to comment on Thursday.

Cassidy anticipates that the reduction in originations and refinancings will be offset in part by Home Equity Lines of Credit, as homeowners seek to access the equity in their homes.

According to Duncan of Fannie Mae, banks may gain from increasing demand for adjustable rate mortgages, which offer cheaper interest rates for shorter periods.

However, such bright spots will not be enough to protect lenders from a big economic slump, according to Duncan. He also believes that if inflation exceeds 10 per cent, the bright spots will be insufficient to avoid further rate hikes.

“You’d expect an even greater slowdown,” he added.

(Adapted from Reuters.com)

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