Citigroup Inc. “emerged surprisingly” last month as a greater user of an expanded federal mortgage refinancing program as Bank of America Corp. lagged behind, according to Morgan Stanley analysts.
The pace of prepayments on a group of the most-underwater mortgages serviced by Citigroup would erase 41.6 percent of the debt within a year, more than double the rate in November, the month before changes were made to the federal Home Affordable Refinance Program to include such loans, the Morgan Stanley analysts said in a March 9 report. That compares with a 1.3 percentage point gain to 18 percent for Bank of America.
“Amongst large lenders that had not exhibited any large participation in HARP previously, Citi has emerged surprisingly with a greater embrace of the program,” the Morgan Stanley analysts including Vipul Jain and Janaki Rao in New York said in a March 9 report. “BofA so far is not displaying a significant pick-up in prepay speeds,” they wrote.
Mortgage-bond holders and analysts are monitoring the expanded program for Freddie Mac and Fannie Mae loans, being called HARP 2.0, because prepayments can erode returns. The damage may be exacerbated by the shrinking pool of loans with high rates that need underwriting flexibility to refinance, which increases the share of such debt erased when individual homeowners get aided, Morgan Stanley said.
“This idea has very important implications as investors think about the impact of lending capacity on HARP prepayments,” the analysts wrote.
Prepayment speeds for the most-underwater loans serviced by Citigroup topped those at Wells Fargo & Co. and JPMorgan Chase & Co., the leaders under the previous version of HARP. The Morgan Stanley report included prepayments on loans backed by Freddie Mac, issued before June 2009 and with loan-to-value ratios exceeding 125 percent.
Ally Financial Inc. beat the rest of the five-biggest servicers in refinancing loans with loan-to-value ratios exceeding 125 percent, JPMorgan analysts wrote in a report last week.
“Our approach to HARP is consistent with our efforts to help existing homeowners obtain the best options possible for payment relief,” Gina Proia, a spokeswoman for Detroit-based Ally, said in an e-mail. “The company is also focused on refinancing non-HARP eligible borrowers and new purchase originations, where we are also seeing increased activity.”
Defaults, refinancing and home sales have reduced the amount of 30-year mortgages potentially eligible for HARP by 5.6 percent since Dec. 1 to $1.31 trillion, according to Morgan Stanley. Changes to the program, which were urged by President Barack Obama, include the elimination of a cap on loan-to-value ratios, reduced fees and lessened risks for lenders.
“Although the program is relatively new, we are seeing success helping borrowers to lower their mortgage payments,” Mark Rodgers, a spokesman for New York-based Citigroup, said in an e-mail message.
It has “opened up refi opportunities for borrowers whose homes had declined in value,” creating “a great deal of interest” from homeowners, he said.
“Bank of America is fully committed to providing our customers with the benefits of refinancing through our continued implementation of HARP 2,” Terry Francisco, a spokesman for Charlotte, North Carolina-based Bank of America, said in an e-mail. “Investors will begin to see increased activity in secondary markets for HARP 2 later this spring.”
‘Aggressively Building Capacity’
The lender has taken more than 20,000 applications for HARP 2.0 loans for consumers with loan-to-value ratios of more than 80 percent since Jan. 17 and is “aggressively building capacity,” he said.
Prepayments last month among debt targeted by HARP were “significantly higher than expected” by Nomura Securities International, analysts led by Ohmsatya Ravi wrote in a March 9 report. Speeds for mortgages with loan-to-value ratios between 105 percent and 125 percent for all the top-five servicers except Bank of America reached “all-time” highs, they said.
JPMorgan and Ally, the government-rescued lender formerly known as GMAC, began showing higher prepayment speeds in January, while Citigroup and Wells Fargo only began to increase last month, Nomura said in the report.
Key to Program
Bond analysts at firms including Morgan Stanley, JPMorgan and Barclays Capital have said Bank of America’s use of the so-called HARP 2.0 may be key to the impact of the program because the lender oversees about a quarter of mortgages targeted.
Bank of America last month told some customers to wait 90 days before starting an application, according to two people with knowledge of the policy, who requested anonymity because the measure hadn’t been announced. At a March 8 conference, Chief Executive Officer Brian Moynihan said that “we were doing 1,500 apps a day; we have to build the capacity up to 2,000. We’re at about 1,800, so we’re fine.”
The bank “just had to build the capacity back up,” Moynihan said. “This is one of the tricks of the mortgage business as it ebbs and flows.”
The latest data “reinforced” JPMorgan analysts’ view that prepayment speeds among loans with the highest rates may increase by an amount that erases 10 percent more of the debt a year because of HARP 2.0, they said in a March 9 report.
With the “glaring exception” of Bank of America, “major lenders are ramping up their HARP productions,” JPMorgan analysts including Matt Jozoff and Brian Ye wrote. “We recommend investors avoid the HARP-able universe.”
Speeds for the most-underwater borrowers with Ally-serviced mortgages rose to a constant prepayment rate of 67.2, according to JPMorgan, which used data on loans issued from 2005 through 2008 within bonds with average coupons of more than 6 percent. The figure was 47.3 for Citigroup, 31.3 percent for JPMorgan and 26.9 for Wells Fargo. Bank of America was at 21.4, as the industry average was 30.1.