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If there were any doubts left that the U.S. mortgage refinancing wave had crested, broken and was receding, simply look at Wells Fargo. The bank is the largest U.S. mortgage lender, with almost a quarter of the market this year, more than double that of JPMorgan, the second-largest competitor, according to Inside Mortgage Finance. This week, Wells said that it was cutting 2,300 jobs at its mortgage-lending business. The bank had added staff when refinancing demand soared and naturally it is now waning with rising rates. The average rate on a 30-year mortgage has risen about a percentage point since May when the Federal Reserve began talking about tapering its asset purchases.

In the most recent quarter about half of the mortgage applications at Wells were for refinancing. That is down from 65 per cent in the previous quarter and 72 per cent at the end of the last year. New-home purchases would help fill the gap, but the strength and timing of those remains unclear, with rates rising and unemployment persistently high. New-home sales fell 13 per cent in July from June, it was reported on Friday. The value of servicing rights also rises with rates.

Higher rates are good for banks in many other ways, too. But the particulars of this cycle mean that the upside from that may be some time coming. Rates are rising because the Fed is preparing to taper its asset purchases, so the increases are concentrated in longer-term maturities. That means that banks can earn more on their portfolios of securities, but it is rising short-term rates that deliver the biggest benefits to banks by increasing the interest they can earn on variable-rate loans. It is not this simple but, at Wells, for example, securities available for sale accounted for 19 per cent of average earning assets in the second quarter versus loans, which were 63 per cent.

With loan growth in the U.S. still relatively stagnant, banks have a few ways to offset the anticipated pressure on the mortgage business. One is through lower credit losses. Provisions for credit losses at Wells fell nearly two-thirds year over year in the second quarter. Then there are lower expenses, such as the job cuts. Expect more of both.

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Tickers mentioned in this story

Study and track financial data on any traded entity: click to open the full quote page. Data updated as of 28/03/24 7:00pm EDT.

SymbolName% changeLast
C-N
Citigroup Inc
+0.78%63.24
FC-N
Franklin Covey Company
+2.51%39.26
JPM-N
JP Morgan Chase & Company
+0.39%200.3
WFC-N
Wells Fargo & Company
+0.61%57.96

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