April 11, 2014

Virtually Unreported: Mortgage Loan Market’s 2013-2014 Collapse

Associated Press stories today on the quarterly earnings releases of Wells Fargo (unbylined) and JPMorgan Chase (by Steve Rothwell) essentially mocked the nearly continuous monthly stream of reports the wire service’s economics writers, particularly Martin Crutsinger and Chris Rugaber, have generated about the “housing recovery” during at least the past year.

The Wells Fargo story disclosed that the nation’s largest mortgage lender “funded $36 billion worth of mortgages in the first quarter, down sharply from $109 billion a year earlier.” The following graphic from the bank’s detailed financial report tells the full story:

WellsFargo1Q14mortgages

That drop in originations is 67 percent, which the AP’s report did not calculate, though it was eager to tell us that the bank’s net income “surged 14%” and that it “slashed” its loan losses by 41 percent.

Rothwell’s report on JPMorgan Chase did present the bank’s percentage decline (bolds are mine throughout this post):

The bank’s mortgage business continued to slow. The increase in bond yields since last summer has caused mortgage rates to rise, which in turn has slowed refinancing of home loans. Revenue at the bank’s mortgage unit was $1.6 billion, down $1.1 billion from the same period a year earlier. The bank said mortgage originations plunged 68 percent to $6.7 billion, compared with the same period last year.

The bank doesn’t expect the trend to change anytime soon. Chief Financial Officer Marianne Lake told reporters on a conference call to “expect that trend to be relatively consistent.”

In covering the two banks’ earnings reports, Bloomberg News noted the following:

Potential customers are finding they’re sometimes bidding for homes against buyers who don’t need debt. All-cash sales made up 35 percent of transactions in February and 33 percent in January, according to data from the National Association of Realtors.

“There’s frankly a lot more cash buyers today,” Wells Fargo Chief Executive Officer John Stumpf, 60, said during a conference call with analysts to discuss results. Wells Fargo is optimistic about prospects for the rest of this year because rates are still low, homes are affordable, consumer debt is dropping and employment is rising, the bank told analysts.

Dream on, guys. (Aside: Why did we need to know Mr. Stumpf’s age?)

Consumer debt is not dropping. It “has risen every month since August 2011.”  If the bank is taking any comfort in the fact that consumer debts other than student loans have declined a bit, they’re fools.  Student-loan debt is soaring. Early-career college grads who used to be first-time buyers before the explosion in student loan volume are now having to wait for years before they can legitimately afford to buy a home and successfully jump through the stringent Dodd Frank-imposed hoops.

Looking at the overall situation, mortgage applications for purchases dropped to their lowest level in 19 years during February. For those who want to cry “weather,” the graph at the link clearly shows that they’ve been at pre-2000 levels since 2010.

Fundamentally, this isn’t the pre-recession or even the pre-bubble owner-occupied housing or mortgage-lending market. At the rate things are going, we may never see either market get back to anything resembling where they once were.

Zero Hedge took a closer look at the high concentration of cash buyers three weeks ago. Read the whole thing for a fuller understanding, but here are the most relevant takeaways (paragraph breaks added by me):

Remember when housing was the primary aspirational asset for a still existent US middle class, to be purchased with some equity down by your average 30 year-old hoping to start a family in his or her brand new home, and, as the name implies, aspire to reach the American dream? Those days are long gone.

… less than half of all home purchases are debt-funded (including multi-unit dwellings — Ed.), and thus less than half of all home purchases are actually representative of what middle-class America is doing.

the entire housing market appears to have morphed into a “flip that house” investment vehicle

… if nobody used leverage (i.e., mortgages) to buy houses before, they certainly won’t do it now, all the more so with interest rates soaring and purchase affordability imploding in front of everybody’s eyes.

The short version: The so-called “housing recovery” the Associated Press and others constantly tout doesn’t exist in any meaningful way.

If this kind of calamity was occurring during a Republican or conservative administration … oh, you know the rest.

Cross-posted at NewsBusters.org.

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