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Housing is back, so why the mortgage layoffs?

A for sale sign stands in front of a home on March 26, 2013 in Miami, Fla.

The latest Case-Shiller housing index report is out. Long story short, housing prices are going up, but slowly. Interest rates are also on the rise. Not good news for buyers and lenders. Citigroup just announced that it laid off 1,000 employees, all of them from its mortgage division. Several of the country's biggest banks are trimming their mortgage operations. It's the result of big changes happening in the world of refinancing.

If you go back about 20 years and look at mortgage applications, you would find that the vast majority, 80 percent, were new home purchase loans and the rest were refinancings. Today it's nearly the opposite. Only about 30 percent of all mortgage applications are new purchase loans.

"We've had this prolonged refinancing boom because mortgage rates just continued to hit new lows, and a lot of people kept refinancing over and over again," says Greg McBride, a senior analyst with Bankrate.com.

The result of the refinancing boom was that banks hired more employees, and over time the mortgage divisions generated a larger portion of the banks' profits. "Think of it almost like a seesaw in the respect that when rates are really low, refinancing takes off," says McBride.

And now that interest rates are rising, the demand for refinancing is dropping, says Jed Kolko, chief economist at Trulia. "And typically when you have a mortgage rate spike of half a point in a month, which is a big increase but that's what we've had in May and June, refinancing rates tend to drop by almost half."

So what does all this mean for the housing market? For homeowners, it means that refinancing will save them less. For banks, it means they will be looking for ways to make up for the decline in revenue in their mortgage divisions. "I expect we are going to see some banks increasing their home purchase lending, making it easier than it has been to get a mortgage for people that are looking to buy a home," says Kolko.

According to the new Case-Shiller report, that home will cost about 2 percent more than it did last month.

About the author

David Weinberg is a general assignment reporter at Marketplace.
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