Rate-starved U.S. banks happily gobble mortgage business

Mon Jul 18, 2016 7:45am EDT
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By David Henry

NEW YORK (Reuters) - Just as mortgage bankers were preparing for the end of a historic boom driven by low interest rates, borrowers have begun knocking at their doors again.

In earnings reports last week, JPMorgan Chase & Co (JPM.N: Quote), Wells Fargo & Co (WFC.N: Quote) and Citigroup Inc (C.N: Quote) said they originated $94 billion worth of new mortgages during the second quarter in their core mortgage operations, an increase of $23 billion, or 31 percent, over the first quarter.

The reason for the sudden burst of business? Mortgage rates have dropped to lows not seen since 2013 after the U.S. Federal Reserve dashed expectations for near-term rate hikes. That has led existing borrowers to try and lock in better rates. New borrowers, meanwhile, have been enticed by low borrowing costs and low down-payment offers.

With mortgage rates near historic lows, and volumes still strong in the early days of the third quarter, banks predict the trend will continue, providing a bright spot in a low-rate environment hammering their wider results.

JPMorgan has added more than 1,000 employees this year to handle the swell in mortgage business, said Mike Weinbach, its chief executive of mortgage banking. He believes U.S. lenders will make about $1.8 trillion of mortgage loans this year, 40 percent more than he had expected at the start of the year.

"We thought the refinance market was going to shrink sharply," Weinbach said in an interview. "We've seen a market that has been much bigger than expected."

All this may be cold comfort to big U.S. lenders that desperately need rates to rise for broader profits to improve. Though low rates bring in new mortgage business and deliver fees from refinancing, banks are hard pressed to generate substantial income when rates fall too low.

Adding to the pressure on margins, US banks’ cost of funding has also risen. The difference between what banks pay for U.S. dollars and the Federal Reserve's expected policy interest rates on Friday hit its widest since August 2012.   Continued...

A man walks into the JP Morgan headquarters at Canary Wharf in London May 11, 2012.  REUTERS/Dylan Martinez/File Photo