U.S. banks are preparing for a tough road ahead for mortgage banking.

Mortgage volumes took a hit in the first quarter as interest rates began to rise and stifle refinance activity. While mortgage volume declined in the first quarter, so too did banks' fee income.

One industry group thinks the bleak results in the first quarter are just a taste of what is to come this year. The Mortgage Bankers Association in its most recent mortgage finance forecast report published April 13 estimated that overall mortgage originations for 2022 will total about $2.562 trillion, down 35.8% from $3.991 trillion in originations in 2021.

Some bankers also held grim outlooks for the segment for the foreseeable future as the Federal Reserve hikes up interest rates.

"We are forecasting that if 30-year first mortgages pops 6% or tops 6%, the mortgage market is going to dry up very, very, very quickly," First Internet Bancorp Chairman and CEO David Becker said on the company's first-quarter earnings call.

First Internet decreased its mortgage banking revenue guidance for the full year to between $8 million and $9 million from its previous guidance in January of between $12 million and $13 million for the year.

Lowering noninterest income guidance as a result of lower fee income expectations was a common theme during first-quarter earnings as banks recognized the reality of the faster-than-expected rising rate environment.

Zeroing in on expenses

Some banks are focusing on expenses in response to the hit to mortgage-related fee income.

Wells Fargo & Co. reported a 21% quarter-over-quarter decline in mortgage originations, the mortgage market's largest quarterly decline since 2003, CFO Michael Santomassimo said on the company's first-quarter earnings conference call. The drop-off was largely driven by lower refinance activity due to rising interest rates, a dynamic that will continue into the second quarter, according to Santomassimo.

"Reflecting this environment, we expect second-quarter originations and margins to remain under pressure and mortgage banking revenue to continue to decline. We've started to reduce expenses in response to the decline in volume," the CFO said.

A little more than a week after reporting first-quarter earnings, Wells Fargo laid off an undisclosed number of mortgage staff, American Banker reported April 22.

Similarly, in light of "significant headwinds" for home lending, Umpqua Holdings Corp. expects to reduce its headcount "to meet expected origination volume over the foreseeable future," CFO Ronald Farnsworth said on the company's first-quarter earnings call.

FB Financial Corp. is also hoping to offset the decline in mortgage banking volume through managing expenses. Executives said on the first-quarter earnings call that they plan to reduce the company's mortgage origination capacity and size of its operational functions to operate through the coming cycle. FB Financial is also exploring technology options to bring efficiency to the business.

The announcement comes after the company reported a $281,000 loss for its mortgage segment in the first quarter following pressure on both in-branch and online originations.

"In this current environment, both of those dried up at the same time. We haven't experienced that before where both of them just went away at the same time. And so that one has been a little more challenging for us to handle in this environment than what we've experienced before," President and CEO Christopher Holmes said on the call.

A rosier outlook

Despite the less-than-stellar outlook for mortgage banking, some banks remained bullish on the segment.

Community Bank System Inc. acknowledged that rising rates and inventory challenges present headwinds for its mortgage business, but "regardless of the environment, we almost never not grow our mortgage business in the second and third quarter. So we would expect, absent something we can't predict, that we will also have good growth in the second and third quarters," President and CEO Mark Tryniski said on the company's first-quarter earnings call.

The company reported a $500,000 decline in mortgage banking revenue year over year.

First Republic Bank also remained upbeat on its outlook for its mortgage business. The company originated $8.4 billion in single-family residential loans and $1.7 billion in multifamily residential loans in the first quarter, representing the second-highest quarter of originations for each respective portfolio ever, Chief Banking Officer Michael Selfridge said on the company's first-quarter earnings call.

"Rising rates, yes, that will be a headwind for refi," Selfridge said."[But] looking back historically, refi has never dropped below 40% of our total single-family origination volume. We think that will hold pretty well."

Prior CEO and current Executive Chairman and founder Jim Herbert II echoed the sentiment that "the mortgage business will continue" despite "more violent" interest rate increases from the Fed.