By Jeffrey P. Snider
Barclays' (NYSE:BCS) results were somewhat unexpected, mostly because the size of the declines in revenues across investment banking (-37% Y/Y profits) were much weaker than first estimates. It was very much expected that fixed income “trading” would see broadly lower results, and that was confirmed, but the scale of the reactionary “cost management” efforts seems a bit disproportionate. The bank indicated it would like to cut 12,000 jobs, 9% of its global workforce, decrying the state of banking in early 2014.
Banking just isn’t what it once was, all the way back eight months ago. The dynamics of the credit and funding markets have altered the financial consensus, including perceptions of stability and “tail risks.” Trading and lending have taken to a pause, and the once formidable financial renaissance is now stumbling noticeably. Stocks only awoke slightly in January to the possibility of a paradigm shift, but Barclays is just one example that the financial markets have indeed become ensnared.
For domestic banks, and the Federal Reserve’s fervent hopes for monetary-driven gains in the real economy, that is most evident in mortgages (though fixed income trading continues to be down significantly in its own right). All the major banks report drastic reductions in mortgage volume – and just because interest rates rose to what only a few years ago would have been historic lows of 4.5%. What kind of economy/recovery is it where demand is only expressed at extreme levels? There is a lot to be said about that.
Any way you look at it, it is ugly and growing uglier. Wells Fargo (NYSE:WFC), the largest mortgage lender, originated only $50 billion in mortgages in the fourth quarter. That was down 60% from $125 billion in the fourth quarter of 2012. Wells executives are now claiming that some of that was intentional, as they now say that they were a little concerned about such a huge market share (30%). No company likes to dominate their own market, right? Only a year ago, Wells’ CEO proclaimed of mortgages, “every quarter we have more confidence.”
Over at JPMorgan (NYSE:JPM), they only funded $23.3 billion last quarter, a drop of “only” 54% Y/Y. For both Morgan and Wells, those were the lowest volume levels since 2008.
Overall, the mortgage market in 2014 is currently expected to decline by 35%, according to the latest (January) forecast from the Mortgage Bankers Association (MBA). Refi origination volume is expected to decline a massive 60%, to about $440 billion. That is a huge blow to one of the only monetary channels left open.
That figure has been revised downward pretty steadily since October, when the first window into the state of mortgage finance post-tightening opened. Back in October, however, the collapse in refis was believed to be offset by a growing volume in mortgages for home purchases. If there was to be a silver lining here, that was it.
October estimates for Purchase volume in 2014 saw 9% growth over 2013; by January those expectations were cut to 3.8% growth. Total mortgage volume is now anticipated at $1.2 trillion, leaving a $500 billion debt hole in the QE mechanics; an “unexpected” headwind since taper is not assumed to be tightening.
It is also curious to see just how the MBA has changed its rationale for reducing its estimates further in January. Back in October, the MBA cited “rising interest rates and a weak job market” as reasons for declining demand for mortgage finance. By January, as estimates were further reduced, the MBA changed to:
“Despite an economic outlook of steady growth and a recovering job market, mortgage applications have been decreasing,” Mike Fratantoni, chief economist for the Mortgage Bankers Association, said.
Consistency is difficult to attain, particularly caught in the wash of month-to-month precision, but a stronger economy is now irrelevant to mortgage demand? That is the only way to make sense of reducing estimates of mortgage volumes and holding the position that the economy and payrolls have “steadily” improved since October.
Again, such cannot be consistent where a small increase in interest rates from an extremely low level to a slightly less extremely low level produces a collapse. That is fully inconsistent with any kind of economy other than one malfunctioning. If that isn’t enough on its own, and it really should be given the incongruity here, perhaps the overall state of banking as we progress further into 2014 is at least a sign of the times – and it isn’t anything like the unblemished and unbridled enthusiasm of the good ol’ days of April 2013.