“Mortgage Lending Drops to 17-Year Low as Rates Curb Borrowing” – Money News

Posted on :Apr 14, 2014

Money News

April 14, 2014

While the mainstream media continually asks Americans to ignore our economic reality, more reality greets us this morning. It seems that without full-time good paying jobs the U.S. housing market will continue to stumble. Note to Washington; minimum wage, part-time workers cannot afford new homes.

U.S. 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 & Co. and JPMorgan Chase & Co., the two largest U.S.  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 association.

“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.

Rising Rates

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.

Cutting Staff

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 & 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.

Cash Deals

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 U.S. 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.”

Institutional Landlords

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 S&P/Case-Shiller index. The gains have slowed as  climbing values in the past two years started to reduce affordability.

Small Market

Prices for single-family homes rose in fewer areas in the fourth quarter,  with 73 percent of U.S. 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.”

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