By Michelle Price and Elizabeth Dilts Marshall

WASHINGTON (Reuters) – With soaring interest rates scaring off would-be mortgage borrowers, the outlook for banks’ home lending portfolios is gloomy, according to first quarter filings and analysts.

The average interest rate on a 30-year fixed-rate mortgage, the most popular home loan, rose to 5.13% in the week ended April 8, the highest since November 2018, according to data from the Mortgage Bankers Association (MBA).

That rate is up more than 1.5 percentage points since the start of the year as the U.S. Federal Reserve has begun to tighten financial conditions to cool soaring inflation.

While rate rises can be good for bank profits, the surge in borrowing costs is dampening demand for mortgage originations, according to MBA data and bank executives.

“The increase in rates negatively impacted our mortgage banking business,” Wells Fargo CEO Charlie Scharf told analysts on Thursday. “The mortgage origination market experienced one of the largest quarterly declines that I can remember.”

Wells Fargo home loans fell 33% from a year ago on lower mortgage originations and lower gains when selling those loans in the secondary market. The bank’s executives warned they expect mortgage banking revenue to continue to decline in the second quarter.

At Citigroup, mortgage originations were down 30% from the first quarter last year, while JPMorgan Chase & Co. said home lending net revenue was down 20% “predominantly driven by lower production revenue from lower margins and volume.”

As rates hit record lows last January, homeowners rushed to refinance their mortgages, prompting banks and brokers to ramp up capacity. Now, with the Fed poised to hike further, the MBA forecasts that total mortgage originations will fall 35.5% this year, with a 64% decline in refinancings.

“We have a classic case of a mortgage boom to bust cycle,” said Gerard Cassidy, Head of U.S. Bank Equity Strategy at RBC Capital Markets. “As the rates go higher the refinancing business is cooling, which it always does, and is going to force a massive shrinkage in the mortgage banking business.”

Lenders’ first quarter presentations showed the excess capacity in the market was pressurizing margins, especially on secondary market sales, Cassidy said, adding that the industry would likely see a period of consolidation.

Still, analysts said they did not expect a repeat of the decade-ago crisis, in large part because lending standards are much more stringent, but also because a larger proportion of home loans are ultimately held by institutional investors.

In addition, the country’s biggest, most systemically risky banks now only account for roughly a third of the mortgage industry, said Ken Leon, Research Director at CFRA Research.

“It’s the shadow banks that dominate and are probably suffering,” said Leon. In the absence of a major recession on the horizon, Leon said a mortgage crisis was not a major risk for 2022. “The real triggers there would be…unemployment and inflation continuing to outpace income.”

(Editing by Alistair Bell)