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Wells Fargo & Company (WFC - Analyst Report) announced 1,800 job cuts in its home-loan production business. It has issued a 60-day notice to the concerned employees. The recent layoffs follow the company’s retrenchment of 3,000 jobs earlier this quarter, including 2,300 job cuts in August across the U.S. in its mortgage servicing segment.
Wells Fargo, the largest mortgage originator in the U.S., had recruited 11,406 mortgage loan officers earlier this year. The prevalent low interest rates then were favorable for homebuyers and the company had intended to improve its top line by augmenting home loans.
However, the recent change in the interest rate environment is challenging for Wells Fargo’s mortgage business. As per experts, though the increase in interest rates depicts an economic revival, it will negatively impact consumers’ demand for mortgage refinancing. Therefore, mortgage lending is expected to slow down for the rest of 2013.
Moreover, demand for new home purchases failed to compensate for the reduced refinancing. Notably, Wells Fargo expects to originate about $80 billion in home loans in the third quarter of 2013, down 29% sequentially.
Analysis reveals that an increase in interest rate leads to mortgage loans becoming costlier. Further, with the overall economic improvement, the prices of real estate properties are bound to rise. Therefore, investors have to buy relatively costlier property with loans that come at a higher price.
As per experts, in the forthcoming quarters the loan demand could fall lower than what is expected. Hence, large mortgage lenders such as Wells Fargo are striving to minimize losses by adopting stringent cost-cutting measures.
Through this move, Wells Fargo joins other banking giants like Citigroup Inc. (C - Analyst Report), JPMorgan Chase & Co. (JPM - Analyst Report) and Bank of America Corporation (BAC - Analyst Report) that have shuttered offices catering to the mortgage business.
Following the recent slump in mortgage demand, Citigroup has shut down its Danville office in Illinois, triggering the elimination of 120 employees. Total job cuts due to declining mortgage demand are anticipated to be around 2,200, including that of several telephone sales agents.
Among other major banks, JPMorgan announced 19,000 job cuts by the end of 2014. The majority of these will be in the bank’s Consumer & Community Banking segment. Additionally, BofA plans to axe 2,100 jobs across its mortgage service segment, with the shuttering of 16 offices by Oct 31.
In the current market scenario, many banks are finding it difficult to cope with the volatile conditions, in which the scope for revenue growth is limited. Hence, the banks are resorting to extreme cost-cutting measures comprising layoffs and closures of business units worldwide.
Recently, Wells Fargo decided to proceed with the sell off of mortgage-servicing rights (MSRs) on $41 billion of government-backed home loans. Wells Fargo is taking this step to scale down its non-core operations and further strengthen its balance sheet.
Additionally, given the new capital regulations, servicing of loans has become a costly affair for the banks. Therefore, Wells Fargo’s move is based on reduction in the mortgage business for adapting new Basel III rules, thereby reducing risks. Currently, Wells Fargo carries a Zacks Rank #3 (Hold).