Mortgage Lenders Turn ‘Desperate’ as Soaring Rates Roil Industry

Home-lending employees are facing risk of job cuts, slumping business as one of the fastest jumps in mortgage rates starts to cool the US housing market.

Danny Meier had one of the busiest years of his career in 2021.

The 36-year-old closed roughly $799 million worth of loans at Academy Mortgage Corp., ranking him among the top producing originators in the US. Now, he’s bracing for a 20% reduction in business and recently had to cut several staff.

“It’s scary,” Meier said in a phone interview. “We have sellers panic listing, and then you have buyer fatigue and buyers stepping out altogether really fast.”

Business has started to evaporate across home-lending firms in recent weeks, after the Federal Reserve boosted borrowing costs to tame decades-high inflation. US mortgage rates are at levels last seen more than a decade ago. That’s hurting affordability for first-time buyers, slowing down sales of previously owned homes and making it unattractive for existing owners to refinance.

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Already, the fallout is cascading across the industry. Wells Fargo & Co. has warned that income from its mortgage-lending business may drop significantly in the second quarter. Employees at the bank’s home-lending division and its rival JPMorgan Chase & Co.’s unit are being laid off or reassigned to different areas. Real estate brokerages such as Compass Inc. and Redfin Corp. also announced plans to cut their workforces earlier this month.

“Layoffs are happening everywhere,” Meier said. “People are cutting rates, cutting costs, with desperate attempts to gain business.”

It’s an abrupt shift for a sector that was just recently experiencing a hiring boom. The latest jobs report showed there were 1.8 million Americans working in real estate in May. That’s the most on record and almost double the available inventory of existing single-family homes in the US. That jobs figure doesn’t include all the people working in housing-related roles throughout other industries like finance.

The pandemic, paired with historically low mortgage rates, spurred a massive wave of demand for homes and a refinancing boom. Prices soared and mortgage lenders set records. Now, the rise in rates has tempered the frenzied pace of the market.

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“As firms tried to meet that demand, they, of course, hired up quite a bit,” Svenja Gudell, chief economist at jobs website Indeed Inc. and former chief economist at Zillow Group Inc., said in an interview. “We’re seeing this sort of normalization in a lot of areas of the economy. And I think housing is one of them.”

‘Totally Dead’

Just last year, mortgage loan originator Joanna Yu closed roughly $522 million in loans. In the past month, she’s only executed about $10 million.

“In 2021, we basically had no life at all,” Yu, a 34-year industry veteran who works at US Bancorp, said by phone. “Recent business is almost totally gone. Business in the first three months of this year was still OK, but starting from April, it was totally dead. It’s like vacation time.”

Intensified competition among lenders is fueling pressure. Last month, Yu said she lost almost every loan to a major international bank because their rates were lower than her bank’s.

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“You only have a small pie, and you have 30-, 40-, 50,000 agents trying to compete to get this tiny pie,” Yu said. “Some banks have become very, very aggressive.”

‘Vanilla Recession’

The real estate industry is used to cyclical changes in the economy and a crash similar to 2008 is unlikely.

Owners have experienced massive gains in home equity in recent years. Plus, the US faces an affordable housing shortage that could help buoy demand. Certain parts of the industry such as construction could benefit if builders continue to replenish inventory. Construction job openings climbed to a record high in April, according to the latest Bureau of Labor Statistics data.

“We are in a very different spot today — in a very, very different spot,” Gudell said. “And this will look much more like a — if there is such a thing — a plain vanilla recession, than what we experienced as part of the Great Recession.”

For some lenders who have been in the business for more than a decade, the current downturn may not be such a bad thing.

“Everybody and their mother was getting into mortgages because it was the hot thing to do,” said Ben Cohen, a managing director at Guaranteed Rate. “I love times like this because it weeds out people that shouldn’t be doing what we do anyways, because there’s a lot of bad lenders out there. It right-sizes everything.”