You can find volatility in every aspect of the market in the past few months. Stocks have seen volatility, and so have interest- rate products like loans and bonds.
Mortgage rates saw their biggest quarterly rise in 28 years. As a result, banks heavily involved in home lending saw their earnings from these activities take a hit in the first quarter.
Image source: Getty Images.
Mortgage rates rocketed higher in the first quarter
This rapid rise in mortgage rates can be attributed to inflationary pressures in the economy. One of the Federal Reserve's mandates is maintaining price stability by keeping inflation in check. One of the tools the Federal Reserve uses is interest rates.
Since November 2021, the Fed has been saying that it would begin tapering some of its pandemic-era monetary policies, including near-zero interest rates. In response to this, interest-rate products saw their rates rise rapidly during the first quarter. At the end of 2021, mortgage rates were around 3.11% on 30-year fixed mortgages. By the end of the first quarter, these rates had risen to 4.67%.
Data source: Federal Reserve economic data.
Banks saw mortgage lending revenue fall
Higher mortgage rates created a challenging environment for mortgage lenders. Three of the biggest lenders, JPMorgan Chase (JPM 0.49%), Wells Fargo (WFC -0.54%), and U.S. Bancorp (USB 1.56%), all noted drastic declines in their mortgage banking revenue during the quarter.
Data source: Quarterly filings. Chart by author. Y/Y = year over year.
Wells Fargo noted that this was the most significant quarterly decline in home lending revenue since 2003, primarily due to lower refinancing activity in the market. Refinancing activity was high ever since the Fed slashed interest rates in the early stages of the pandemic. Many homeowners found it advantageous to refinance, as mortgage rates on 30-year loans dropped below 3% for two years. However, with the rapid increase in mortgage rates, refinancing activity has come to a screeching halt.
What to expect from mortgage lending
Banks expect to continue to see headwinds from higher mortgage rates. According to Freddie Mac, mortgage lenders will face declining demand in the next two years as total originations will be far below the levels seen in the past two years. The mortgage giant expects total originations to drop 36% this year while refinancing originations will drop a whopping 66%.
Data source: Freddie Mac. Chart by author. * Represents forecast amounts.
Looking to the second quarter, Wells Fargo expects originations and margins on those to be under pressure. The reason is that there is a lot of excess capacity in the mortgage lending industry. Many banks and lenders added staff when refinancings were high. However, with originations far below those peak levels, there is too much capacity and not enough demand. Wells Fargo is responding by reducing expenses in this area to reduce its own excess capacity.
U.S. Bancorp could be more insulated from the slowdown, given that 70% of its mortgage originations are purchase mortgages. However, competition for market share will remain high, putting pressure on margins and weighing on mortgage lenders over the next couple of years.
