Home News Big banks’ Q2 earnings to shed light on gloomy U.S. mortgage outlook

Big banks’ Q2 earnings to shed light on gloomy U.S. mortgage outlook

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New York, July 8 (Reuters)-US analysts and economists say that banks’ earnings during the second quarter of this month continue to weigh on mortgage formation and refinancing as US Federal Reserve rate hikes continue to weigh on mortgage lending and refinancing. We are watching how the mortgage business is progressing.

The mortgage sector is shrinking after hiring tens of thousands of staff between 2018 and 2020 to address the mortgage formation and refinancing surge due to low interest rates. US banks including JPMorgan Chase & Co (JPM.N) And Wells Fargo & Company (WFC.N) According to analysts and economists, staff has begun to be reduced and the industry is expected to see more layoffs in the coming months.

Fannie Mae’s Chief Economist, Doug Duncan, said he is backing many US mortgages with Freddie Mac. “Usually there is a delay of about 6 months between market transformation and layoff.”

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Mortgage rates soared to their 14-year highs in June after the Fed raised 0.75 percentage points. According to Freddie Mac, the average interest rate on 30-year fixed-rate mortgages, the most common mortgage in the United States, was 5.3% as of July 7, up from 2.9% in the previous year.

Fannie Mae economists predict that total home sales will decline by 13.5% this year and mortgage composition will decline by nearly 42% to $ 2.6 trillion.

Leading US banks will begin reporting earnings for April-June, the US home buying season, starting July 14.

Bank downsizing

Industry distress began late last year among non-bank lenders focused on refinancing. For example, Better.com fired 900 employees in December, followed by a few non-bank rivals this year. read more

Gerald Cassidy, head of US bank equity strategy at RBC Capital Markets, said major banks are also starting to shrink. “The refinancing business is still under considerable pressure and we expect it to continue throughout the year.”

Wells Fargo, the largest bank in the US mortgage business, cut staff in April and June, one person familiar with the matter said. JP Morgan cut staff among the 10 largest US bank mortgage lenders in June, another person familiar with the plan said. Sources refused to provide the numbers. read more

Mortgages accounted for 6% and 2% of Wells Fargo’s and JP Morgan’s total revenues last year, respectively, according to data compiled by RBC’s Cassidy.

In the first quarter, Wells Fargo reported a 33% year-on-year decline in mortgage revenues, while JP Morgan said net mortgage revenues were down 20%. The decline is expected to continue in the second quarter.

In June, Wells Fargo executives plan to shrink their mortgage business at two banking meetings, and investors need to expect second-quarter mortgage revenues to decline 50% from first-quarter levels. I said there is. read more

Cassidy said in a memo released Tuesday that the shrinking banks could incur temporary charges later this year if interest rates remain high and home sales slow further.

Some small lenders are much worse. First Guaranty Mortgage Corp, a Texas-based mortgage company, filed for bankruptcy last month. read more

Bright spot

But that’s not bad for everyone.

Bank of America Corp (BAC.N)Another major mortgage lender, who hasn’t reduced staff and plans to reduce it again this year, said sources familiar with the matter. In fact, Deutsche Bank analyst Matt O’Connor said banks expect “good and balanced” mortgage growth in 2022.

Bank of America was the only major bank to report in the first quarter of this year that company-wide mortgage revenues increased by nearly 8% compared to 2021. I was doing it during a pandemic. read more

The bank declined to comment on Thursday because it was in a quiet period before earnings.

Cassidy said he expects the decline in origination and refinancing to be partially offset by the home equity credit line, as homeowners are trying to take advantage of home equity.

Banks could also benefit from increased demand for floating rate mortgages, according to Fannie Mae’s Duncan.

Nonetheless, such bright spots would not be enough to isolate lenders from a serious recession, Duncan said. He said that if inflation reaches 10%, there will be too few bright spots to prevent further rate hikes.

“We expect even greater deceleration,” he added.

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Report by Elizabeth Diltz Marshall of New York Edited by Michelle Price and Matthew Lewis

Our criteria: Thomson Reuters trusts the principles.

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