How automation can help banks tame the home-lending ‘roller coaster’

Rising interest rates have led to a drastic drop in demand for home loans and refinancing, resulting in a wave of layoffs in the mortgage divisions at some of the nation’s largest banks, including JPMorgan Chase and Wells Fargo. 

But the cyclical nature of the home-lending sector doesn’t mean lenders should be forced to respond with mass hiring or firing as demand for mortgages ebbs and flows, said Suzanne Ross, director of mortgage product at Ocrolus, which automates document processing for fintechs and banks.

“Staffing just for the volume fluctuation can be costly and damaging to these institutions,” Ross said. “It doesn’t have to be the way it has been historically, where humans were the only option for decision making and some of the rote tasks that needed to be done within mortgage. There are so many different options to help break that cycle.”

Incorporating automation into the mortgage process, such as for review and validation, loan origination, document sorting and income calculation, could help lenders escape the cycle, analysts said.

“To help avoid these boom and bust cycles, lenders need to understand how the mix of human and digital engagement at different parts of the process can be optimized to help reduce costs and improve efficiency,” said Craig Martin, executive managing director and global head of wealth and lending intelligence at J.D. Power. 

Breaking the cycle

Volatility in the mortgage industry is nothing new, Ross said, adding that home loan application volumes have fluctuated dramatically over the past two decades.

Banks’ dependence on staffing up during peaks and cutting roles during lower-volume years, however, is something she is surprised lenders continue to do.

“It’s amazing to me that we continue to go through this cycle over and over,” Ross said. “If you look at a bar graph from 2000 to current, it looks like the best roller coaster ride ever in terms of volume peaks and valleys that occur. Anyone right now suffering that downturn in volume pretty suddenly is forced to do layoffs. But the question becomes, ‘How do we stop the cycle now, going forward?’”

Mortgage applications are at their lowest level since 2000, according to data released this week by the Mortgage Bankers Association.

“Mortgage applications continued to remain at a 22-year low, held down by significantly reduced refinancing demand and weak home purchase activity,” Joel Kan, the MBA’s associate vice president of economic and industry forecasting, said in a statement. 

The purchase index was down 21% from 2021’s comparable period, and refinances were down 83% from last year, the MBA reported.

“Mortgage rates increased for all loan types last week, with the benchmark 30-year fixed-rate jumping 20 basis points to 5.65% — the highest in nearly a month,” Kan said.

The market is not expected to rebound any time soon as the Federal Reserve continues to raise interest rates to quell soaring inflation. The sharp increase in rates is hurting demand for loan refinances as homeowners lack the incentive to make changes to their current payment structure.

“Changes in interest rates can create immense volatility and require major shifts in staffing in a short time,” Martin said.

San Antonio-based insurance and financial services company USAA cut 90 jobs in its mortgage arm in March amid projections of a 34% drop to some 25,000 real estate loans.

Wells Fargo also initiated at least two rounds of home lending-related job cuts this year.

The San Francisco-based bank cut an undisclosed number of positions in its home lending unit in April a week after reporting a 33% drop in origination volume. CFO Mark Santomassimo called it the steepest quarterly decline in mortgage volume since 2003.

A second round of layoffs affected 107 Iowa-based workers in the bank’s home mortgage division based in Des Moines, according to Worker Adjustment and Retraining Notification Act (WARN) notices filed in June.

JPMorgan Chase has also seen mortgage-division layoffs amid the steep drop in demand for home loans and refinancing.

The bank in June laid off hundreds of employees in its home-lending division and reassigned hundreds more, Bloomberg reported.

The market downturn also hit nonbank mortgage specialists who responded with their own staffing adjustments.

Mortgage tech company Blend announced in April it would cut 200 positions across the company, representing 10% of its total workforce.