By Elizabeth Dilts Marshall and Michelle Price
NEW YORK/WASHINGTON (Reuters) – With soaring interest rates scaring potential mortgage borrowers, the outlook for banks’ home loan portfolios is bleak, first-quarter statements and analysts said.
The average interest rate on a 30-year fixed-rate mortgage, the most popular home loan, rose to 5.13% in the week ending April 8, the highest since November 2018, according to Mortgage Bankers Association (MBA) data.
This rate has risen by more than 1.5 percentage points since the start of the year, as the US Federal Reserve began to tighten financial conditions to curb soaring inflation.
While rate hikes can be good for bank profits, soaring borrowing costs are dampening demand for mortgages, according to MBA data and bank executives.
“Rising rates have had a negative impact on our mortgage banking business,” Wells Fargo CEO Charlie Scharf told analysts Thursday. “The mortgage origination market had one of the biggest quarterly declines I can remember.”
Wells Fargo home loans fell 33% from a year ago due to lower mortgages and lower gains when selling those loans in the secondary market. Bank executives have warned they expect mortgage banking revenue to continue to decline in the second quarter.
At Citigroup, mortgage lending was down 30% from the first quarter of last year, while JPMorgan Chase & Co. said net home lending revenue was down 20% “mostly due to lower production revenue due to lower margins and volume.”
Only Bank of America bucked the trend, reporting Monday that companywide mortgages had risen to $16.4 billion from $15.2 billion a year ago. Mortgages fell from the fourth quarter due to the seasonal drop in home purchases, but Bank of America Chief Financial Officer Alastair Borthwick said he was optimistic.
“Over the coming year, we remain quite constructive on mortgage growth, but rates have dampened our enthusiasm a bit at the margin,” Borthwick said on a call with reporters.
As rates hit record highs last January, homeowners rushed to refinance their mortgages, prompting banks and brokers to ramp up capacity. Now that the Fed is poised to continue its hike, the MBA predicts total mortgages will fall 35.5% this year, with refinances down 64%.
“We have a classic case of a mortgage boom-to-bust cycle,” said Gerard Cassidy, head of US bank equity strategy at RBC Capital Markets. “As rates rise, refinance activity is cooling, which it always does, and will force a massive contraction in mortgage banking activity.”
Presentations from lenders in the first quarter showed that excess capacity in the market was putting pressure on margins, particularly secondary market sales, Cassidy said, adding that the industry is likely to experience a period of consolidation.
Still, analysts said they do not expect a repeat of the crisis of a decade ago, largely because lending standards are much stricter, but also because a greater proportion of real estate loans is ultimately held by institutional investors.
In addition, the nation’s largest and most systemically risky banks now represent only about a third of the mortgage industry, said Ken Leon, research director at CFRA Research.
“It’s the shadow banks that dominate and probably suffer,” Leon said. With no 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.”
(Edited by Alistair Bell)
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