Big banks’ second-quarter earnings will shed light on bleak U.S. mortgage outlook

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NEW YORK, July 8 (Reuters) – U.S. analysts and economists will be watching developments in banks’ mortgage business during their second-quarter results this month as U.S. Federal Reserve rate hikes continue to put the brakes on mortgage issues and refinancings.

After hiring tens of thousands of employees between 2018 and 2020 to manage the increase in mortgage originations and refinances due to low interest rates, the mortgage industry is shrinking. U.S. banks, including JPMorgan Chase & Co (JPM.N) and Wells Fargo & Co (WFC.N), have begun cutting staff, with more industry layoffs expected in the coming months, officials said. analysts and economists.

“Over the next two months we’ll see the bulk of the layoffs,” said Doug Duncan, chief economist at Fannie Mae, which, along with Freddie Mac, backs many US mortgages. “There’s usually a lag of about six months between a market turnaround and layoffs.”

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Home loan interest rates hit a 14-year high in June after the Fed raised rates by 0.75% percentage points. The average rate for a 30-year fixed-rate mortgage, the most common home loan in the United States, was 5.3% as of July 7, down from 2.9% a year ago, according to Freddie Mac .

Fannie Mae economists predict total home sales will fall 13.5% this year and mortgages will decline nearly 42% to $2.6 trillion.

Major U.S. banks will begin reporting April-June earnings, historically U.S. home buying season, on July 14.

BANK WORKFORCE REDUCTION

The pain in the industry began late last year among non-bank lenders focused on refinances. Better.com, for example, laid off 900 employees in December, and several nonbank competitors have followed suit this year. Read more

Gerard Cassidy, head of U.S. banking equity strategy at RBC Capital Markets, said the big banks were also starting to downsize. “We expect it to continue throughout the year as refinancing activity remains under considerable pressure.”

Wells Fargo, the largest bank in the U.S. mortgage business, downsized in April and June, a person with knowledge of the matter said. JPMorgan, among the 10 largest U.S. bank mortgage lenders, also downsized in June, said another person with knowledge of its plans. Sources declined to provide numbers. Read more

Mortgage business accounted for 6% and 2% of Wells Fargo and JPMorgan’s total revenue, respectively, last year, according to data compiled by RBC’s Cassidy.

In the first quarter, Wells Fargo reported a 33% year-over-year decline in mortgage revenue, while JPMorgan said net home loan revenue was down 20%. This decline is expected to continue in the second quarter.

In June, Wells Fargo executives said at two banking conferences that they expect to reduce mortgage activity and that investors should expect second-quarter mortgage income to be 50% below market levels. first trimester. Read more

If rates stay high and home sales slow further, a downsizing at banks could result in one-time charges later this year, Cassidy wrote in a note released Tuesday.

Some small lenders have done much worse. Texas-based mortgage lender First Guaranty Mortgage Corp filed for bankruptcy last month. Read more

BRIGHT POINTS

It’s not bad for everyone, though.

Bank of America Corp (BAC.N), another major mortgage lender, has not cut its workforce and has no plans to do so this year, a source familiar with the matter said. In fact, the bank expects “good and balanced” mortgage growth for 2022, said Deutsche Bank analyst Matt O’Connor.

Bank of America was the only major bank to report that company-wide mortgage revenue rose nearly 8% in the first quarter of this year compared to 2021 it had done during the pandemic. Read more

The banks declined to comment Thursday because they are in the pre-earnings quiet period.

Cassidy said he expects the decline in originations and refinances to be partially offset by home equity lines of credit as homeowners look to tap into their home equity.

Banks may also benefit from increased demand for variable rate mortgages, which offer lower interest rates for shorter terms, according to Fannie Mae’s Duncan.

Still, such positives won’t be enough to shield lenders from a major economic downturn, Duncan said. The positives will also be too weak to prevent further rate hikes if inflation hits 10%, he said.

“You would expect an even bigger downturn,” he added.

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Reporting by Elizabeth Dilts Marshall in New York Editing by Michelle Price and Matthew Lewis

Our standards: The Thomson Reuters Trust Principles.

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