By Jody Shenn
Jan. 27 (Bloomberg) — Wells Fargo & Co., the second-biggest U.S. home lender, has been prevented from lowering mortgage rates faster because it can’t keep up with demand and the costs of making home loans are rising, an executive said.
Lenders are more uncertain about how many applications will be rejected amid the weak economy and housing slump, which boosts their expenses, Cara Heiden, co-president of the San Francisco- based bank’s home-loan unit, said in a telephone interview. At the same time, applications industrywide are at a five-year high, more than mortgage companies can handle after waves of staff reductions.
“We in the mortgage industry, we are all building capacity†after cutting back as home sales and prices plunged, Heiden said yesterday.
While the average rate on a mortgage hit a record low this month, the disparity with 10-year Treasury yields hasn’t been this big during a period of Federal Reserve monetary policy loosening since 1982. That’s led consumers and lawmakers, including Rep. Maxine Waters, a California Democrat, to say that banks should be offering even lower rates, especially after the Treasury allocated $250 billion for capital injections so they could step up lending and curb the U.S. recession.
Soaring volumes and higher expenses show that lenders aren’t being greedy, and rates on typical mortgages also “absolutely†don’t reflect banks charging more because of a fear of defaults as home prices plunge, Heiden said. Most new home loans are meant for quick sales through government-supported programs, she said.
Average Rate
The average rate on 30-year fixed mortgages rose last week to 5.12 percent, from a record low of 4.96 percent a week earlier, according McLean, Virginia-based Freddie Mac. After the Federal Reserve announced plans to buy $500 billion of home-loan bonds, rates fell from 6.46 percent in October, about tripling the pace of applications between the four weeks ended Jan. 16 and Nov. 21, according to the Mortgage Bankers Association.
If lenders offered even lower rates, they wouldn’t be able to handle the resulting surge in applications, Heiden said. “As rates improve, volume increases,†she said.
On Nov. 4, Wells Fargo, the biggest bank on the U.S. West Coast, said that it had cut a “handful†of employees in Fort Mill, South Carolina, and Minneapolis, part of its centralized mortgage sales and fulfillment teams.
More applicants are turning out to be ineligible for loans because borrowers seeking to refinance mortgages owe more than their homes are worth or consumers fail to meet other guidelines for government-supported loans, she said. Still, lenders are saddled with the cost of beginning to process the applications.
Expenses Rise
Greater uncertainty about so-called pipeline fallout rates also is boosting lenders’ expenses in their use of derivatives, such as forward-sale contracts and options, to hedge against interest-rates changes before they sell the debt, Heiden said.
The “vast majority†of Wells Fargo’s new home lending is geared toward loans that can be sold, Heiden said. Granting loans eligible for sale in the “secondary market†today mostly involves matching the criteria of government-supported Fannie Mae and Freddie Mac or the Federal Housing Administration. Lenders also can make loans to hold onto in their portfolios.
“There is secondary market pricing, and there’s portfolio pricing,†she said. Only “the portfolio pricing is a function of compensating us†for the risks that loans will default or be repaid either sooner or later than a bank would want.
After accounting for about 85 percent of the more than $1.8 trillion of home loans granted last year, U.S. government-backed lending will probably represent at least 90 percent of $2 trillion projected for this year, according to Guy Cecala, publisher of the Inside Mortgage Finance newsletter.
Bank of America
Charlotte, North Carolina-based Bank of America Corp., the largest U.S. mortgage originator, is “aggressively working†to build capacity to serve more customers, Dan Frahm, a spokesman, wrote in an e-mail yesterday.
“As more capacity is available across the industry, this may drive further rate improvements as lenders try to gain share through competitive pricing strategies,†he wrote.
Profit margins for home lenders appear to be soaring, according to Keith Gumbinger, a vice president at mortgage- research firm HSH Associates Inc. Atlanta-based SunTrust Inc.’s origination income was unchanged between the third and fourth quarters as its volume fell 11 percent, Chief Financial Officer Mark Chancy said on a Jan. 22 conference call.
To contact the reporter on this story: Jody Shenn in New York at jshenn@bloomberg.net.