U.S. banks that have been earning record profits from home loans are adding or transferring thousands of staff to catch up with demand for refinancing after shortages blocked homeowners from getting lower rates.
Employment tied to mortgages rose 9 percent this year through September to 285,000, the most since 2008, according to the Bureau of Labor Statistics, as lenders responded to Federal Reserve efforts to push down borrowing costs, President Barack Obama loosened requirements, and housing recovered from a six-year slump. Even as banks added staff, they failed to keep pace, and kept mortgage rates “much higher” than they should be to curb demand, said Vipul Jain, an analyst at Morgan Stanley.
Those constraints are lifting after banks built up units to handle the highest level of refinancing since 2009. JPMorgan Chase & Co., the biggest U.S. bank by assets, has transferred 3,500 people from servicing to mortgage originations and Wells Fargo & Co. has expanded its operations staff by at least 25 percent this year. The hiring comes before a potential acceleration in volume after President Obama’s re-election saw debt yields tumble and increased the possibility of expanded programs to help homeowners improve rates.
“The trend in headcount is upward,” Jain said in a telephone interview. “During the next three to six months, we’re expecting a 10 percent increase in capacity.”
Banks are adding home loan staff after the top five companies reported a record $8.35 billion in income from mortgage banking during the third quarter, according to newsletter Inside Mortgage Finance. In contrast, the six largest U.S. banks have reduced headcount by more than 25,000 in the twelve months ended in September, as regulators demand more capital and global growth slows, according to data compiled by Bloomberg.
Lenders profited as the Fed encouraged refinancing by purchasing mortgage bonds to push down borrowing costs to record lows, known as quantitative easing, or QE. While 30-year rates are 3.34 percent, down from 5.05 percent in February 2011, they could be lower based on bond prices, according to data compiled by Bloomberg.
“Capacity constraints are a big issue in the mortgage market right now and even though mortgage rates have dropped post QE3, there is more room for them to drop from here,” Gary Kain, the president of American Capital Agency Corp. the second-largest mortgage REIT with $102 billion of assets, said on a Nov. 1 conference call with investors.
The gap between rates for the loans and the bonds into which they’re packaged is 1.27 percentage points, about 59 percent higher than the 5-year average. It reached a record 1.7 percentage points in September.
At JPMorgan, the biggest U.S. bank by assets, mortgage-production margins are “very high” at “well over” 2 percent, up from less than 1 percent historically, Chief Executive Officer Jamie Dimon said on an Oct. 12 conference call about its record $5.7 billion in quarterly earnings.
“Since lenders can’t meet the demand they raise mortgage rates to temper it,” said Jain.
The time it takes banks to close on loans also indicates the industry’s failures. Mortgage refinancings completed in October took an average of 57 days, up from 47 days in June and 42 days a year earlier, according to data compiled by Pleasanton, California-based Ellie Mae.
To keep up with mounting application volumes, Wells Fargo added about 7,000 fulltime employees that process, close and underwrite mortgage loans since the second quarter of 2011, Michael Heid, president of Wells Fargo’s home-loan unit said this month at a presentation in Boston, which showed its hiring.
After adding more than 2,500 people to underwrite loans this year, more than half from outside of the company, the bank is hiring to fill more than 1,000 open underwriting positions, said Tom Goyda, a spokesman for the company.
The bank made or bought the largest number of home loans originated in the first nine months of 2012, with 30.3 percent of the market, according to Inside Mortgage Finance.
The lender can scale down dramatically, as it did in 2010 when staff in the unit was cut by 5,000 during a six-month period as rates rose and volumes dropped off, Heid said.
JPMorgan, the second-largest lender, increased its mortgage origination operations by 50 percent this year to 10,200. That will increase its ability to handle refinancing volume and improve ability to rapidly grow or shrink originations capacity, according to a Nov. 1 company presentation at the Boston conference.
Rather than hiring from outside, JPMorgan moved 3,500 employees from servicing mortgages to making them, according to spokeswoman Amy Bonitatibus.
“By leveraging our skilled and experienced employees, we avoid the costs of recruiting, hiring and training new employees and of paying severance for roles we no longer need,” Bonitatibus said in an e-mail.
Mortgage origination volume at the bank reached $47 billion in September, a 29 percent rise from the prior year, according to the company. Most of the employees across the country new to the origination side of the businesses will serve as loan officers, which work directly with customers to help them buy or refinance homes by processing applications and collecting financial documents. There are still about 400 open sales positions in the department, Bonitatibus said.
The New York-based lender agreed this month to buy MetLife Inc.’s $70 billion mortgage-servicing business, which will increase its own servicing arm by more than 5 percent, according to a statement. This gives JPMorgan a pool of borrowers whose loans it can service and offer to refinance, increasing fees.
Some of the extra staff may be added to the servicing side where banks can earn “fat fees,” Walt Schmidt, a mortgage strategist in Chicago at FTN Financial, the brokerage unit of First Horizon National Corp., said in a telephone interview.
“They don’t necessarily want to turn over the current borrowers too quickly,” Schmidt said. While more employees will increase the speed of processing loans, banks don’t want to lose the high fees produced through their mortgage servicing books, he said.
The failure of central bank policy to loosen mortgage credit has frustrated Fed Chairman Ben S. Bernanke and Shaun Donovan, secretary of the U.S. Department of Housing and Urban Development. They’ve expressed concern that banks are preventing qualified borrowers from taking advantage of the record low interest rates.
Borrowers whose loans closed in October had an average credit score of 750, according to Ellie Mae. Homebuyers with Fannie Mae and Freddie Mac loans made down payments averaging 21 percent.
Some homeowners may also be postponing refinancing in anticipation that rates will continue to fall lower, which could lead a wave of prepayments that negatively impact securities tied to the loans, according to Merrill Ross, an analyst with Baltimore-based Wunderlich Securities Inc.
Prepayments on loans backing Fannie Mae’s 5 percent securities, filled with loans with rates averaging about 5.5 percent, rose to a pace that would erase 35.1 percent of the debt in a year, according to data compiled by Bloomberg. That exceeded August’s 33.3 percent pace even as Hurricane Sandy delayed some closings and was the highest in at least a decade.
Mortgage bond investors monitor prepayment rates since they influence returns. Bondholders risk losses when buying debt for more than 100 cents on the dollar as the value can be erased when homeowners take out new mortgages too quickly to repay existing debt. With debt trading below face value, returns increase when repayments accelerate.
Real estate investment trusts that invest in mortgage debt declined 0.3 percent today in New York. They’ve declined 7.9 percent, including reinvested dividends, since the Fed said it would buy an additional $40 billion of the securities a month in September.
“The lull in refinancing activity could lead bond investors to believe the worst prepayment activity is over, and RMBS portfolio managers could buy assets that have less value than they currently anticipate, Ross said in a telephone interview. ‘‘That attitude is dangerous. People have to anticipate that the Fed is going to get what it wants.’’