Just as Jane Fraser was named CEO of CitiMortgage nine months ago, the mortgage industry was undergoing a seismic shift as refinancing activity began its free fall.
The O’Fallon, Mo.-based unit of Citigroup, the country’s third-largest bank by assets, relied on mortgage refinancings to account for a bulk of its business for several years. But as interest rates began to rise last year, refinancings fell, prompting changes in business models and layoffs for many companies, including CitiMortgage.
“The day I started at CitiMortgage was the day the market started responding to the Fed, and inevitably was the end of the refi boom,” Fraser, who became CEO in May 2013, said in an interview with the Post-Dispatch.
The change has been dramatic. Refinancings accounted for 78 percent of all mortgage applications a year ago, and that’s since dropped to 61 percent last week, according to the Mortgage Bankers Association, a Washington-based trade organization.
The average interest rate for a 30-year loan, while still at historical lows, was 4.33 percent last week, according to mortgage buyer Freddie Mac, up from 4.28 percent a week earlier. A year ago, the average interest rate for the same loan was about 3.5 percent.
The sharp decline in refinancings was one of the reasons Charlotte, N.C.-based Bank of America gave for the layoff of more than 280 employees in St. Charles County this month. Nationstar Mortgage, which is based in Lewisville, Texas, also said this month that it’s laying off 115 people at its office in the Westport area that opened last year, leaving only a couple dozen workers at its facility. Last fall, Wells Fargo laid off 126 employees in its consumer mortgage loan processing division in St. Louis.
“This is the new normal,” said Eve Janis, president of the St. Louis Mortgage Bankers Association. “You don’t have people knocking down your door to refinance anymore.”
Looking ahead, CitiMortgage’s Fraser said the industry is headed toward refinancings accounting for just 40 percent of mortgage applications.
That’s meant refocusing CitiMortgage on its fundamentals, residential mortgages for home purchases.
“For the first time in a decade, we had to go back to the basics of mortgages again: how do we help people buy homes and stay in them,” she said.
With the drop-off in refinancing business, CitiMortgage spent the past year realigning its offices across the country. The company closed offices in Las Vegas and Danville, Ill., and instead chose a few hub cities from which to operate: O’Fallon; Ann Arbor, Mich.; Tucson, Ariz.; Jacksonville, Fla.; and Dallas.
The realignment meant laying off employees — 1,000 sales, fulfillment, underwriting and default jobs were eliminated in September alone, including a “small number” locally, the company said, without specifying the number of local jobs cut.
CitiMortgage’s workforce in O’Fallon has dropped from about 4,900 at the beginning of 2012 to 4,700 currently. Companywide, CitiMortgage employs 16,000 in the U.S.
Responding to the changes in the industry, CitiMortgage has sought to make better connections with Citi’s other banking operations, from the consumer bank to commercial and corporate banking, to boost business.
CitiMortgage’s sales staff have also looked to deepen and expand their partnerships with real estate agents and homebuilders.
“You didn’t need to before, when you just picked up the phone and the demand was there,” Fraser said.
The company is working on developing technology that can make the homebuying process simpler and add services such as storing customers’ documents in a digital vault for safe-keeping.
One app it is developing would allow customers to track the process of their mortgage application in real time, and notify them on their smartphones or iPads what forms and documents need to be signed.
Fraser said that as the economy improves and unemployment drops, O’Fallon will continue to play a vital role in growing CitiMortgage’s business.
“We’ll be looking at how we can grow in St. Louis going forward,” Fraser said. “It’s about how we grow market share, and I feel good about our ability to do that.”
As a testament to the importance of its mortgage business, Citigroup plans to hold its annual shareholders meeting this year in the St. Louis area, which would be a first for the banking giant.
For other lenders that relied heavily on revenue from refinancings, there’s also been a similar shift.
At USA Mortgage, which is based in west St. Louis County, 75 percent of its business was from refinancings in January 2013, with the remainder home purchases. A year later that ratio flipped to 75 percent home purchases and 25 percent refinancings.
In the heyday of refinancing, the company posted the best year ever, with $1.75 billion in loan originations in 2012. The drop in refinancing activity brought that down to $1.35 billion in 2013.
“What we’ve done is change our business model from being the most dominant in St. Louis to being the most dominant in the state of Missouri,” said Doug Schukar, USA Mortgage’s chief executive and president. The company opened new Missouri offices in Lake Ozark and Kansas City last year, in addition to an office in Springfield in 2012.
Home sales have been sluggish, but that’s starting to change, he said.
“One of my top guys had 48 loans in the preapproval stage with none committed to purchase for all of January and early February, and yesterday six of those turned into purchases,” Schukar said in mid-February.
Plunging refinancing activity led Pulaski Financial Corp., the parent company of Creve Coeur-based Pulaski Bank, to a 20 percent decline in profit in its most recent quarter. The bank, one of the largest mortgage originators in St. Louis, saw its mortgage revenue drop 65 percent in the quarter.
Gary Douglass, Pulaski Bank’s CEO, said the drop-off in refinancings meant layoffs for about 20 employees last fall. But in other areas, the bank has been growing to increase loan production, including adding new mortgage loan production offices in several Midwest states and hiring additional loan officers.
For the first time, the 92-year-old bank also is looking to acquire a mortgage banking company in its core markets that has annual production volume of between $200 million and $1 billion.
“You can’t shrink your way to success in this business,” Douglass said.
Pulaski has a sizable commercial loan business, and that diversification has helped the bank during the mortgage slowdown.
“There will be a lot of shakeout in our business,” he said. “There are too many mortgage companies chasing a smaller pool of dollars. I think a lot of people will get out of the business.”
Several St. Louis-area mortgage offices with five or fewer employees already have closed their doors and its brokers have aligned with larger mortgage offices or banks.
Layoffs in the industry started last fall and picked up at the start of the year, according to the St. Louis MBA’s Janis. Her group has focused on holding networking events to bring mortgage industry professionals together to talk to others in the industry about job opportunities.
Regulations in the Dodd-Frank Wall Street Reform and Consumer Protection Act, passed in 2010, including higher levels of documentation from homebuyers and those refinancing, have driven up loan production expenses, compounding the challenges facing the industry, according to Janis.
“The domino effect of the Dodd-Frank Act, a slow jobs market and increased costs to banks and mortgage bankers that offer loans has resulted in staffing reductions and layoffs both locally and nationally,” she said.
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