Banks say mortgage business remains grim

US banks including Wells Fargo and US Bancorp have warned of another grim quarter in the mortgage banking business as new purchase applications fail to offset a big drop in refinancing.

Tim Sloan, chief financial officer of Wells Fargo – the biggest originator of US home loans – prepared investors for a further weakening in the mortgage business in the fourth quarter at a conference in New York on Tuesday.

“We expect mortgage originations to decline from the third-quarter levels, both reflecting lower refinance volume and normal fourth-quarter seasonality in the purchase market,” Mr Sloan said.

At the same investors’ conference, US Bancorp predicted a 30 per cent decline in its quarterly mortgage banking revenues.

While many of the big banks grew their mortgage businesses to take advantage of a boom in refinancing – fuelled by low interest rates – they are now rapidly trying to cut costs to overcome a drop off in the business prompted by rising rates.

Wells Fargo has announced job cuts of 6,200 in its mortgage business as a result of the slowdown in refinancing. The bank expects to recognise that fully in its expenses in the first quarter of next year, said Mr Sloan.

Customers have been deterred from refinancing as rates have increased. The average interest rate on a 30-year fixed-rate mortgage rose to 4.44 per cent, the highest level in a month, according to the Mortgage Bankers Association.

Mortgage originations totalled $80bn at Wells Fargo in the third quarter, a 29 per cent drop from the previous quarter. The percentage of refinancing slumped to 41 per cent of its mortgage business compared with as much as 69 per cent in the first quarter of the year.

Andrew Cecere, chief financial officer of US Bancorp, said on Tuesday: “Production will be a little lower and gain on sale margin a little lower also.” He also attributed lower revenues to lower servicing revenue and a positive hedging move in the previous quarter.

While declines in the mortgage banking business have continued throughout the year, Wells Fargo is more optimistic about 2014. “Assuming that we don’t see a tremendous amount of interest rate volatility, we’ll probably have a stabilised mortgage market next year,” Mr Sloan said.

The comments echoed the forward-looking optimism of Bank of America’s chief executive who said last week that the US housing market was “fairly stable”.

Margins in the mortgage business are likely to remain around current levels as opposed to dropping to the levels of eight or nine years ago, Mr Sloan said. Higher margins that the bank enjoyed over the past year were “unsustainable” but “it was nice while we had them”, he added.

“From our perspective, we think there’s been a fundamental shift in the industry,” said Mr Sloan. “There’s a lot more regulation. There are fewer competitors. The competitors are much more rational and the products tend to be sold based upon service and reliability.”