Banks’ mortgage-servicing lines post losses amid falling rates

Lenders can hedge against losses, but the speed of falling rates caught many off guard

Falling interest rates are generally seen as a boon to banks’ mortgage business as borrowers increasingly take out new loans to buy homes or refinance.

But lower interest rates hurt some of the country’s biggest mortgage banks, which reported the size of their mortgage-servicing businesses declined in the second quarter.

Banks that have reported their second-quarter earnings disclosed that the value of the servicing rights fell between 7 percent and 10 percent, the Wall Street Journal reported.

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Wells Fargo, the country’s largest holder of those rights, said the value fell 9 percent from the end of the first quarter to $12.1 billion. JPMorgan, the second-largest, reported a drop of 15 percent to $5.1 billion.

Banks usually use derivatives to hedge against volatility in service rights. But some were caught off-guard by how quickly interest rates shifted.

“Mortgage companies do best when rates move steadily in a direction as opposed to rapidly in a direction,” Stephen Lynch, a credit analyst at S&P Global Ratings, told the Journal. “We definitely saw a dislocation.”

Consumer mortgage originations grew at Wells Fargo, JPMorgan and Citigroup during the second quarter thanks to lower interest rates. Fed Chair Jerome Powell earlier this month signaled that the Fed will lower rates in the near future. [WSJ] – Rich Bockmann