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Bank mortgage entities suffocate at high home values
There were two apparent statements last month when it was reported that Well Fargo would dismiss 638 operatives from its home mortgage department. In any case, Wells does not appear to be in a strong position to include mortgage loans in its financial statements because the Federal Reserve has covered its US banking book's asset base after a fraudulent account seizure.
It' is a sign of a bigger phenomena that banking depositors can no longer ignore: real estate values in the US have gone so high that purchasers are staying out of the mall. Fannie Mae home buying mood poll participants said high price was the main explanation why it's a good idea to buy a home - and the main explanation why it's a poor idea to buy one.
In July, the number of home purchases decreased by 1.5 per cent compared to the previous year, the fifth consecutive months that, according to the National Association of Realtors, recorded a decrease. But none of this is enough to counter the paralysing effect of very high pricing, and the mortgage banks are experiencing the impact.
The Mortgage Bankers Association (MBA) application index shows that new mortgage requests, without refinancing, remained unchanged last year after three years of continuous growth and declined strongly last months. Mortgage loans account for more than one-third of Wells' overall credit portfolio, making them the highest residential construction potential of any major US bank.
However, at Bank of America and JPMorgan Chase, mortgage loans make up a fifth of the credit portfolio. Even more important, all three shortterm bankers are generating high-yield fees by granting and managing mortgage loans that are sinking. Non-interest mortgage revenues at Wells decreased by 28 per cent in the first half of this year.
JPMorgan Chase saw it fall by almost 40 percent. Among the large privately held firms that specialize in granting and serving loans such as Quicken Loans and Freedom Mortgage, the effects of the deceleration on new mortgage and refinancing activity will be even greater. These mortgage creditors have flooded the mortgage markets. Those banking institutions that have been pushing back credit for years after the economic downturn are back on the markets, in competition with the non-bank providers that replaced them.
Wells Fargo CEO Timothy Sloan in July pointed to the cycle of "overcapacity" in the mortgage sector and the potential for streamlining in the next few months. JPMorgan Chase CFO Marianne Lake also made similar remarks this sommer. Fundamental macroeconomics proposes that high home values would promote more choice, something that could upset the markets and revitalize banks' assets.
Under the MBA, overall home ownership volumes are expected to decline this year and increase only slightly in 2019, while price increases will remain in the middle singledigit range. Assuming this proves right and interest Rates keep rising slowly, mortgage lending and Wells and the other major US financiers will remain under strain, and Wells' announcements of layoffs may not be the last to be seen by the sector.