Rates rising, banks hit the brakes on mortgage business

Timothy A. Clary | AFP | Getty Images

With the mortgage boom officially over, banks are closing facilities and units that have been servicing customers looking to refinance their home loans.

JPMorgan laid off more than 2,000 employees in early August—about half of them in originations, according to a person familiar with the situation. The bank had said in February that it would cut 17,000 jobs (largely in the mortgage servicing unit, which handles bad loans) by the end of 2014. The August round of layoffs represented the first time the bank had moved to downsize its origination business, which surged as mortgage rates went to historic lows.

Banks hit breaks on mortgage business

Other Wall Street banks are making similar moves, as a sharp rise in rates has kept consumers from taking out or refinancing mortgages.

Late last month, Bank of America notified 2,100 employees that their jobs were being cut; Wells Fargo has laid off more than 3,000 since July. Citigroup confirmed Wednesday the July closure of an office in Danville, Ill., that affected 120 jobs.

"The Danville facility was originally established to handle the surge in demand for refinancing," said Citi spokesman Mark Rodgers, who added that other telephone sales positions supporting mortgage banking would be cut.

(Read more: Mortgage apps plunge, refinancing hits 4 year low as rates soar)

Consumers rushed to take advantage of low rates to refinance mortgages. Though the Federal Reserve is expected to keep short-term rates low for some time, talk of potentially slowing the Fed's stimulus program has led government bond yields—to which mortgages are tied—straight up.

The average rate on a 30-year-fixed mortgage rose to 4.57 percent last week, versus 3.53 percent in May. While most industry executives expected the market to slow as interest rates rose, few expected it to screech to a halt as it has.

At an investor conference this week, JPMorgan Chase CFO Marianne Lake called the drop-off in mortgage activity "dramatic and rapid."

Executives expected that an improving economy and rising housing prices would spur more people to take out mortgages to buy homes, but Lake said that volume won't compensate for the refinancing business that has dried up.

(Read more: Map: Tracking the recovery)

According to the Mortgage Bankers Association, mortgage applications fell 13.5 percent in the week ended Sept. 6, and the portion of mortgages from refinancing fell only slightly. William J. Rogers, CEO of Atlanta-based SunTrust, said his company's mortgage applications were down 40 percent in August and July.

(Read more: Fannie, Freddie making billions—why shut them down?)

Just a month shy of third-quarter earnings, bank caution is contagious. Both Lake and Tim Sloan, CFO of Wells Fargo, the nation's largest mortgage provider, suggested that their mortgage volumes would fall more than 30 percent. Sloan projected Wells Fargo's originations at just $80 billion in the third quarter, down from $112 billion in last quarter, with few areas for the bank to make up that business.

In a low-rate environment, an expanding mortgage business was a bank's saving grace. In the third quarter, it could be the industry's Achilles' Heel.

By CNBC's Kayla Tausche. Follow her on Twitter: