Rising Mortgage Rates Lead to Job Cuts

The interest rate on a 30-year fixed rate mortgage has climbed from about 3% in January to more than 4.4% in August. Research firm SNL notes a month-over-month decline in lending at the four largest lenders, and only one, Wells Fargo, posting year-over-year growth. Lending at J.P. Morgan Chase & Co. (NYSE: JPM) is down more than 6% compared with the second quarter of 2012. Bank of America Corp. (NYSE: BAC) lending is down nearly 9%, and Citigroup Inc. (NYSE: C) lending is down nearly 10%. At Wells Fargo, lending is up about 1%.

For the most part, the blame is assigned to refinancings, which have dropped from highs of over 80% of all new mortgage applications to less than 65%. And even though the market for new homes is improving, it is not rising fast enough to pick up the slack.

Wells Fargo is not the only large bank cutting staff. Citigroup has said it will fire 120 employees at a call center in Illinois, and J.P. Morgan plans to pare 15,000 mortgage-related jobs by the end of 2014, according to SNL. Bank of America cut 1,320 jobs at its Buffalo, N.Y., mortgage servicing office earlier this year.

What is causing the rise in interest rates and the decline in mortgage applications, as well as the job losses? The U.S. 10-year Treasury note yield rose to around 2.9% last week and is down before markets open Monday morning to around 2.79%. The interest rate on a 30-year fixed rate mortgage historically averages about 1.5% above the yield on the 10-year Treasury. That is about where rates are now.

And what is causing the 10-year yield to rise? Most likely the belief that the Fed will begin tapering before the end of this year is creating enough uncertainty in the equities markets that the safe haven of U.S. debt is becoming attractive again. Even gold has reacted positively to the tapering talk.

As the cheap money made available by the Fed leaves the market, Treasury yields will continue to rise and so will mortgage rates. Wages and incomes for the vast majority of Americans are unlikely to rise at the same pace, and that will crimp the mortgage lending business. The impact on housing is more difficult to predict, but the recovering market for new houses may not be hit until mortgage rates rise to about double today’s rates.