More Wells Fargo mortgage layoffs are likely, executives say
Layoffs in Wells Fargo’s mortgage division will likely continue over the next few months as rising interest rates erode the bank’s refinancing business, executives said Friday.
Income from home lending fell to $972 million during the second quarter of 2022, a 53% decrease from more than $2 billion during the same quarter last year. Further declines in the third quarter are possible since the “mortgage market is expected to remain challenging” in the near future, Chief Financial Officer Mike Santomassimo said Friday in a call with analysts.
Like other mortgage lenders, Wells Fargo has been laying off staffers as its home-loan origination volumes fall. Santomassimo said more job cuts might be coming.
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“We are making adjustments to reduce expenses in response to lower origination volumes, and we expect these adjustments will continue over the next couple of quarters,” he said after the $1.9 trillion-asset bank reported its quarterly earnings.
The dip in mortgage income contributed to a nearly 50% drop in the San Francisco bank’s profits. Wells Fargo’s net income fell to about $3.1 billion in the second quarter, or 74 cents per share, down from more than $6 billion, or $1.38 per share, one year earlier.
The U.S. mortgage sector has been hammered by the Federal Reserve’s interest rate hikes and its reduced footprint in the mortgage-backed securities market. The central bank supported the mortgage-backed securities market throughout much of the COVID-19 pandemic with $40 billion of purchases each month.
The Fed’s monetary tightening has led to a sharp jump in mortgage rates, with the 30-year fixed rate average rising to 5.51% this week, up from 2.65% in January 2021, according to Freddie Mac data.
Higher rates have prompted a “big slowdown” in refinance volumes across the mortgage industry, Santomassimo told reporters on Friday. Refinancing made up 28% of Wells Fargo’s total mortgage originations during the quarter, down substantially from 59% at the end of 2021.
The home purchase market is still seeing some activity as people look to buy new houses, but purchase volumes have been “impacted a little bit as well,” Santomassimo told reporters.
“It’ll be, I think, a challenging market in the mortgage business for the next couple of quarters,” he said.
More broadly, Wells Fargo has also been rethinking its footprint in the massive U.S. mortgage market, CEO Charlie Scharf told analysts. The bank’s home lending division was a “hell of a lot bigger than we are today” when Scharf was hired in late 2019, he said.
The group made some $34.1 billion in loans during the second quarter of 2022, down from $53 billion in the same quarter in 2019.
Wells has been shifting its emphasis by making existing customers the “primary focus” of its mortgage business, while still trying to reach more customers “to the extent that we have efficiencies,” Scharf said.
“We’re not interested in being extraordinarily large in the mortgage business, just for the sake of being in the mortgage business,” Scharf said. “We’re in the home lending business because we think home lending is an important product for us to talk to our customers about, and that’ll ultimately dictate the appropriate size of it.”
The bank’s mortgage cutbacks make sense given that tough market conditions mean the opportunity is “a shadow of itself,” Kenneth Leon, director of equity research at CFRA, said in an interview.
“This is block-and-tackle fundamentals for management to really reduce that business,” Leon said.
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