US mortgage lending is
contracting to levels not seen since 1997 — the year Tiger Woods won his first of four Masters championships — as rising
interest rates and home prices drive away borrowers.
Wells Fargo (WFC) amp; Co. and JPMorgan Chase amp; Co., the two largest
US mortgage lenders, reported a first-quarter plunge in loan
volumes that’s part of an industry-wide 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 percent has kept housing prices
rising, squeezing more Americans out of the market. That will
help push lending down further this year, according to the
“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, Connecticut. “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 percent
of its originations went to customers refinancing loans,
compared with 69 percent 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 percent last week, up from 3.54 percent a year ago,
according to a statement from Freddie Mac.
Lenders also are tightening credit standards, requiring
higher FICO scores. More than 40 percent of borrowers in 2013
had scores above 760, compared with about 25 percent 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 amp; 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
percent, 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 percent
of US residential sales in February, up from 20 percent 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 percent 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, California.
“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 percent since a post-bubble low
in March 2012, according to the Samp;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 percent of US cities experiencing
gains compared with 88 percent 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.”
To contact the reporters on this story:
Kathleen M. Howley in Boston at
Zachary Tracer in New York at
Heather Perlberg in New York at
To contact the editors responsible for this story:
Vincent Bielski at