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The Disappearing Mortgage Lenders

The Disappearing Mortgage Lenders

| July 31, 2023

 At one point, Wells Fargo was and wanted to be the biggest residential mortgage lender in the United States. However, in January of this year, they changed their mind. Turns out they are simply following Bank of America and JP Morgan Chase, albeit with a more drastic cutback in their mortgage pipeline. All three banks, see risk in mortgages that aren’t worth the return.

I can’t read the minds of the big bank leadership but let me venture a guess. At first glance, mortgage rates going from 3% to 7% in a two years would mean there’s a lot of profit to be made in a 30 year mortgage. But at second glance, that’s not necessarily the case. Banks have to pay interest on your money so their cost of capital has also gone up. In other words the spread that they take home as profit. hasn’t improved all that much.

Furthermore, the cost of financing a home at 300k at 3% is a lot cheaper than at 7%. That means less borrowers going forward. If that’s so, why keep a large staff going after less customers.

Also, mortgage refinance would make no sense for current homeowners. In fact, homeowners don’t want to sell because they can’t get the same monthly payment on a better house. Short term, this drives the price of homes up by lowering supply.

Perhaps they also see echos of the interest rate hike that stalled the real estate boom in 2005 and 2006. This was a precipitating (although not the only) factor that led to the credit crisis of 2008. Should a market stall happen, in real estate and/or stocks, the Federal Reserve will cut rates. When that causes a flurry of activity the banks can rehire and refire up the mortgage division.

There’s one other factor. Wage growth has stalled since the 1970’s as I’ve pointed out in other blogs. Could it be that the big banks realize that today’s new home buyer has all but given up? Todd Wood seems to think so. In fact, he’s betting his company on it, by building homes with the sole intent to rent them. He blames a societal shift and the need for the current generation to move and be hippies.

However, with rising inflation, stagnant real wage growth, interest rates at 20 year highs and the post-traumatic stress of watching their parents suffer through the 2008 housing crisis what would you expect. Hopefully, if a Generation Z or Millenial decides to buy a home there will be banks offering mortgages and someone willing to sell. 

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