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The High Cost of Profitable Quarters: Wells Fargo and Citi Announce Mortgage Division Layoffs

Robert Ottone
Jul 24, 2013

Typically, when a company reports solid financial gains, that means that they aren’t doing badly, right? High revenue surely means that workers' jobs are safe, that business will continue, undaunted for at least another quarter. Unfortunately, in big business, this isn’t the case for companies like Wells Fargo and Citigroup, who both announced the layoff of hundreds of employees in their respective mortgage divisions. "While business decisions such as these are always difficult, they are a necessary part of our strategy of remaining a competitive and strong player in the mortgage industry," wrote Mark Danahy, a Citi managing director and head of origination services in a company memo. National Mortgage News highlights the fact that JPMorgan Chase stated that layoffs could potentially continue into the third and fourth quarters of 2013. "We're just now starting to see layoffs," Keith May, a partner at Richey, May & Co., an accounting and consulting firm said. "It's a cyclical industry with these types of cycles that are boom or bust. When refinance volume disappears it creates a short-term problem that everyone has to work through to get back to normal levels. Refinances made up 70 percent of total volume last year so production volumes are going to be off significantly from 2012, and companies will be forced to start laying off staff.” Citigroup posted an income of around $4 billion in revenue, an increase of over $1 billion from 2012. In fact, Citigroup’s numbers posted increases of around 42 percent when compared to their 2012 take. How an increase of 42 percent results in the firing of hundreds of employees is anyone’s guess, but all indications lead to mortgage refinances. Overall, refinances are expected to drop around 60 percent by next year, these layoffs are the first of many, should the refi market take a bigger hit by the beginning of Q3 2014. Wells Fargo alone is laying off around 350 employees, though they service one-third of every single mortgage on the market. After their powerful second quarter, Wells Fargo Chairman and CEO John Stumpf stated, "Compared with the prior quarter, we grew loans, deposits, and net interest income, and both our efficiency ratio and credit quality improved, Wells Fargo again demonstrated an ability to grow during a dynamic economic and interest rate environment, and we feel very well positioned to continue to perform for our shareholders over the long-term.” Both Citigroup and Wells Fargo point at mortgage rates remaining elevated as the primary reason for the layoffs. Both companies project mortgage revenue dropping 30 to 40 percent should rates remain around the current two-year high of 4.51 percent. "While rising interest rates will reduce housing demand, rates would have to increase considerably more before the reduction in demand for home purchases would be substantial across the country," said Frank Nothaft, chief economist at Freddie Mac.
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