Wells Fargo & Company (WFC - Analyst Report) announced 700 job cuts in its home lending business. It has issued a 60-day notice to the concerned employees. The recent layoffs come on the heels of the company’s retrenchment of 250 jobs last month, bringing the total tally to around 6,900 since July.
Wells Fargo, the largest mortgage originator in the U.S., had recruited 11,406 mortgage loan officers earlier in 2013. 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 change in the interest rate environment is challenging for Wells Fargo’s mortgage business. Though the increase in interest rates depicts an economic revival, it has negatively impacted consumers’ demand for mortgage refinancing. Therefore, mortgage lending has slowed down in the second half of 2013 and is expected to continue in the first quarter of 2014.
Moreover, demand for new home purchases has seasonally declined. 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.
Notably, in 2013, mortgage banking income declined 25% year over year. Further, mortgage loan originations plunged to $351 billion, down 33% year over year.
Therefore, the company has resorted to layoffs in its mortgage business. It is majorly making job cuts in back office operations comprising processing and fulfillment of mortgage applications. However, loan officers originating loans directly to home owners are mostly retained. Wells Fargo is also working to accommodate most of the terminated employees in other operational areas of the company.
In the forthcoming quarters the loan demand could fall lower than the expected level, but the pace is anticipated to slow down. 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 Corp. (BAC - Analyst Report) that have shuttered offices catering to the mortgage business.
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. Currently, Wells Fargo carries a Zacks Rank #3 (Hold).