US mortgage demand begins slowing down

US mortgage rates are near a two-year high and are likely to climb further after the Fed’s decision in December

Wells Fargo & Co and Bank of America Corp said they’re starting to see demand for home loans taper as the Federal Reserve raises interest rates.

Wells Fargo, the biggest US mortgage lender, said Friday that its pipeline of applications for home loans dropped 40 per cent to $30 billion (Dh110 billion) at the end of the fourth quarter, compared with three months earlier. The decline capped a year in which mortgage revenue fell to $6.1 billion, the lowest level since 2009. Bank of America, meantime, said its pipeline shrank 43 per cent in the quarter as fewer customers sought to refinance existing debts.

“It’s a rate-sensitive product,” Bank of America Chief Executive Officer Brian Moynihan told analysts Friday on conference call to discuss quarterly results. “The sudden rise in long-term rates caused a noticeable decline in applications.”

US mortgage rates are near a two-year high and are likely to climb further after the Fed’s decision in December to increase its benchmark lending rate. While such hikes may help banks boost net interest margins — the difference between what firms charge for loans and pay depositors — executives are bracing for a subdued year for mortgage revenue.

US home loan originations may drop 17 per cent to $1.5 trillion in 2017, according to Keefe, Bruyette & Woods. Contracts to purchase previously owned US homes decreased in November because of the increase in mortgage rates and limited inventory, according to figures released last month by the National Association of Realtors in Washington.

Banks also cited ways that the impact may be blunted. Even if the pipeline shrinks, a larger share of loan applicants may decide to complete the process as they believe rates will keep getting worse, Wells Fargo Chief Financial Officer John Shrewsberry said in a telephone interview.

“Everyone wants to get their loan closed before rates move up,” he said. Once customers initiate transactions, they’ll work harder to finish them, he said. “They don’t want to start over again. They don’t want to expose themselves to either refinancing at a higher rate or trying to buy a home at a higher rate.”

A drop in earnings from servicing home loans also weighed on the quarter. JPMorgan Chase & Co., Wells Fargo and Bank of America all reported declines in that business.