As the largest U.S. banks rebuild their mortgage lending, with gains last quarter, they face the challenge of finding qualified borrowers and the possibility of rising interest rates.
JPMorgan Chase & Co., Wells Fargo & Co. and Citigroup Inc. all posted mortgage lending gains in the third quarter from the prior period, according to statements. Refinancing by homeowners, who took advantage of the lowest interest rates of the year, drove the industry’s growth, according to an estimate by the Mortgage Bankers Association.
Banks’ lending remains far below last year’s levels as they struggle to increase home-purchase mortgages after imposing tough credit requirements. Wells Fargo had a decline in purchase loans in the quarter, and JPMorgan said it’s cutting another 1,000 mortgage jobs after eliminating 6,000 this year. Lenders benefited from a drop in rates as investors sought safety in bonds amid global economic and political turmoil.
“After a miserable year for mortgages, we are starting to see some small signs of life in the market,” said Diane Swonk, chief economist at Mesirow Financial Holdings Inc. in Chicago. “Lenders are hoping that by the end of this little revival in refinancing, the purchase market will be strong enough to take over.”
MBA estimated that refinancing volume grew 5.5 percent in the third quarter compared with 0.6 percent for purchase loans.
Wells Fargo, the largest U.S. mortgage lender, said originations rose 2.1 percent to $48 billion in the third-quarter compared with the second. That’s a 40 percent drop from the year-ago quarter.
The San Francisco-based bank’s refinancing business pushed lending higher, growing 18 percent to $14.4 billion in the third quarter. The lender’s bigger business, providing home purchase mortgages, fell 3.4 percent to $33.6 billion.
“You’ve got demand for mortgage borrowing still not where people might expect it to be,” John Shrewsberry, chief financial officer of Wells Fargo, said in an interview. “It’s a combination of later household formation, a little bit more consumer debt in households, first-time homebuyers in particular.”
JPMorgan, the No. 2 mortgage lender, said volume in the third quarter jumped 26 percent to $21.2 billion. That’s a 48 percent decline from last year.
Marianne Lake, the New York-based bank’s chief financial officer, said on a conference call that the bank gained market share in high-quality jumbo loans, or mortgages above $417,000 in most areas, and conventional loans, those purchased by Fannie Mae and Freddie Mac.
Lake said that while a lot of refinancing has already happened, rates are now lower than bankers had expected.
“It’s reasonable to assume that there’s going to be some continued headwinds,” Lake said yesterday. “But having said that I think there’s going to be a window of opportunity.”
Citigroup Inc., the No. 7 mortgage lender, saw a 15 percent gain in lending to $7.1 billion in the third quarter. That’s a 51 percent falloff compared with a year earlier.
The mortgage industry posted its first back-to-back quarterly lending gain in almost two years. As homeowners saw the value of their properties rise, they rushed to refinance after missing rates near all-time lows last year, said Mesirow’s Swonk.
The U.S. median home price reached a seven-year high in June, giving some owners the 20 percent equity they need to refinance. Borrowers who don’t have 20 percent equity have to buy mortgage insurance — a monthly fee that can make refinancing too costly.
“These are some of the stragglers who missed last year’s bottom because they didn’t have enough equity to refinance,” said Swonk.
They refinanced as the average rate for a 30-year fixed mortgage dropped to 4.12 percent in the third quarter, the lowest since the first three months of 2013, according to data from Bankrate Inc. The rate reached a 21-month low of 4 percent last week.
Lenders face a tougher task boost their lending volume as they hold borrowers to the highest standards in more than two decades. Banks imposed strict rules after regulators forced them to buy back more than $80 billion of soured mortgages from Fannie Mae and Freddie Mac due to underwriting errors.
The average FICO credit score for borrowers who bought homes in August was 755 on a scale of 300 to 850, according to loan processor Ellie Mae. That compares with an average score of about 715 a decade ago, said Mark Zandi, chief economist at Moody’s Analytics Inc.
“One of the key problems for housing is the lack of credit, especially for first-time homebuyers,” said Zandi. “Banks have cut off a whole pool of creditworthy borrowers” by keeping standards so high.
John Stumpf, chief executive officer of Wells Fargo, said on a conference call yesterday that the bank is working with federal regulators to address the issue of tight credit. He said lenders are trying to get clarity from regulators about when they have to repurchase a loan in default and when the risk transfers to Fannie Mae and Freddie Mac.
“If the originator does a poor job and doesn’t underwrite properly, sure they should be held accountable,” Stumpf said. “But if a default happens later and it’s due to a technical issue unrelated to the payment ability of the customer that could have been known, then risk should transfer.”
Stumpf said that getting more certainty from regulators on repurchase risk would change the way the bank looks at credit overlays.
“There are a number of Americans who want to buy a home, can afford to buy a home, who simply can’t get credit,” he said.
The MBA said that the average 30-year fixed mortgage rate probably will rise to 4.5 percent in the fourth quarter. That would chill the rush to refinance and dent the part of banks’ business that has been growing.
At the beginning of 2014, every major housing forecaster projected mortgage rates would continue to rise throughout the year as the Federal Reserve neared the end of its asset purchases. Instead, rates went down.
Some of the credit belongs to Vladimir Putin, the president of Russia, said Sam Khater, deputy chief economist at mortgage data firm CoreLogic Inc. Putin’s support of Ukraine rebels led to economic sanctions from the U.S. and the European Union, one of Russia’s largest trading partners. Investors concerned about an economic recession in Europe began flocking to the U.S. bond market, boosting demand for mortgage-backed securities and driving rates lower, said Khater.
“The U.S. is widely seen as a safe haven — safe, relative to everything else — and that’s where investors head when they get nervous,” Khater said.
The increase in refinancing gives some breathing room to lenders as they wait for demand in the housing market to improve, said Erin Lantz, vice president of mortgages at Zillow Inc. Growth in purchase mortgages should replace refinancing in the first half of 2015 as gains in home prices slow, she said.
“As the housing market stabilizes, there certainly will be enough vibrancy to sustain a healthy mortgage industry going forward,” Lantz said. “Before we get to that point, there is going to continue to be some dislocation shift” as lenders cut staff to adjust to a smaller market, she said.
Banks began slashing their mortgage staffs when refinancing applications started to dwindle last year. In September, there were 2.57 million people working in bank lending departments, down 42,000 from a year earlier, according to the Bureau of Labor Statistics.
For the fourth quarter, Wells Fargo and JPMorgan said their mortgage lending will be down due to seasonal changes. The period is the slowest of the housing cycle because of cold weather and the holiday break. Lending will likely will drop 12 percent from the earlier period, according to an MBA forecast.
The next big test for the mortgage industry will come in the second quarter of 2015, when the spring selling season gets underway, CoreLogic’s Khater said.
“Refis are going to come and go,” Khater said. “Purchase lending is the way to gauge the lasting health of the mortgage market.”
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