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. 

And Better.com is conducting its fourth round of job cuts since December, according to TechCrunch. The mortgage company has trimmed half of its workforce — or more — since December, Fast Company reported.

‘A twilight zone’

“The entire hire-and-layoff routine is a knee-jerk reaction,” Ross said. “I feel like the entire mortgage industry is in a twilight zone of repeating history over and over again.”

As lenders look to scale up during the next hot housing market, automation is the best option to avoid more mass layoffs, expensive onboarding and costly mistakes that could arise from reassigning tasks, Ross said.

Banks should look at sign-on bonuses and the training and retaining of new employees as costs that cut away from the high profit volumes they could be receiving during times when the market is hot, Ross said.

“When volume dips and those margins are shrunk, they don't have the free money that they did or should have had from a high-volume environment,” she said. “They're forced to just lay those employees off, which also costs a lot of money in severance packages.”

Lenders also run the risk of accruing costly mistakes made by employees absorbing tasks that were previously held by someone who was let go, she said.

“It can create a higher quantity of compliance and calculation errors. And that could cost thousands of dollars,” Ross said. 

Banks that have made massive cuts in their mortgage divisions should supplement automation into their workflow and eliminate some of the repetitive rote tasks of the employees that have been off boarded, Ross said.

“This way, the remaining staff is still utilized in a way where [a lender] can retain them,” Ross said. “Moving forward, they’ll be able to scale up when volume increases, keep those employees retained and the morale high.”

Automation can also expedite the loan origination process and keep banks competitive, said Michael Coar, CEO of VirPack, a document management service.

“Workflow and automation tools help staff move quickly through loans, automating many steps, reducing the time to close and reducing the borrower’s ‘shopping’ time, helping to ensure that your bank isn’t losing the loans that are out there to other lenders,” he said.

Banks that lose out on mortgage customers could also see a drop in consumers using other offerings, Martin said.

“While some force reductions are inevitable, failing to strike the right balance risks having consumers shop elsewhere for a mortgage, which increases the risk that the consumer will move the relationship to have all their needs met somewhere else,” he said. “The need to cut costs in tough times is inevitable and while short-term business solvency is a necessity, cost-cutting measures can adversely impact key clients and harm the long-term health of the business with the outcome of winning the battle and losing the war.”

Perch, a Toronto-based home buying platform, has automated 65% of the mortgage broker's process, said Alex Leduc, the firm’s CEO.

“Layoffs in the mortgage industry aren't cyclical, but rather are structural to reflect the changing nature of their role,” he said, adding automation has helped Perch free up staff to focus on where they add the most value: advising clients.

“In the long run, though, that should mean that the number of people employed in this sector primarily as administrative and operational roles are made redundant through automation,” Leduc said.

Firms eyeing the benefits of automation should consider implementing changes while mortgage volume is low, Ross said.

“Trying to implement technology in a really high-volume environment is difficult,” she said.