Banks Pad Profits as U.S. Prolongs Refinancing Boom: Mortgages

Banks Pad Profits as U.S. Prolongs Refinancing Boom
Wells Fargo & Co. won a $30 million judgment against prison-service provider Medical Development International Ltd. over the repayment of loans. Photographer: Scott Eells/Bloomberg

The biggest U.S. mortgage lenders, whose first-quarter earnings were buoyed by gains on home-loan refinancings, are raking in more profits as record-low interest rates and government efforts prolong the boom.

Revised federal programs making it easier for homeowners to lock in lower rates helped push the Mortgage Bankers Association refinancing index to a three-year high last month. That signals a windfall for banks including Wells Fargo & Co. that renewed about 5 million loans in 2011 amid the Federal Reserve’s drive to keep borrowing costs near zero. Wells Fargo is the nation’s largest home lender.

Refinancings probably rose 4.2 percent to $275 billion in the quarter ended last week, the bankers group forecast, three months after saying the boom was over. About 5.6 million loans will be refinanced this year, said Keith Gumbinger, vice president of HSH Associates, a mortgage-research firm in Pompton Plains, New Jersey.

“We keep refinancing and coming up with new programs to get to the bottom of the housing market,” said Nancy Bush, an analyst and contributing editor at SNL Financial, a bank-research firm in Charlottesville, Virginia. “This fits into the general narrative that we are not yet out of the market aberrations from 2008 and 2009.” Government efforts are “pushing revenue” to the banks, she said.

Wells Fargo, based in San Francisco, posted $2.87 billion in mortgage-banking income in the three months ended March 31, the most since the final quarter of 2009, according to the bank’s statements. JPMorgan Chase & Co. set a record for home-loan production income amid gains from the federal Home Affordable Refinance Program, or HARP.

‘Best Idea’

JPMorgan analysts led by Vivek Juneja said in a July 2 report that Wells Fargo stock is their “best idea” among the largest U.S. banks, in part because of its “strong mortgage-origination revenues.” Its shares fell 1.1 percent to $33.11 at 12:51 p.m. in New York, paring this year’s gain to 20 percent.

While a boon for banks, the Obama administration’s housing policies and Federal Reserve Chairman Ben S. Bernanke’s cheap cash also are giving consumers the chance to save as much as $14 billion a year. The average borrower saves about $2,500 a year in a loan renewal, said Mark Zandi, chief economist at Moody’s Analytics Inc. in West Chester, Pennsylvania.

The government last year eased standards for HARP, giving Fannie Mae and Freddie Mac borrowers an opportunity to refinance no matter how little equity they have in their homes. During a conference call with analysts in May, Wells Fargo Chief Executive Officer John Stumpf said the lender’s origination volume has been helped by HARP.

“I suspect there will be continued volume there,” Stumpf said.

Federal Initiative

A federal program that went into effect June 11 attempts to bolster refinancing of FHA mortgages. The so-called Streamline program allows people with existing FHA mortgages to refinance without credit checks, home appraisals or minimum income requirements.

The government refinancing index more than doubled in the week ended June 15. While the measure dropped 21.5 percent for the period ended June 29, it “continues to be at an elevated level,” Morgan Stanley analyst Janaki Rao said a note today.

“We expect high customer demand for this product,” Vickee Adams, a Wells Fargo spokeswoman, said in an e-mailed statement. The bank started accepting FHA Streamline applications on June 19 and has more than 500,000 customers who may qualify, she said.

Higher Margins

Banks are profiting on the spread between the price at which they fund the loan and what they sell it for to Fannie Mae and Freddie Mac -- the so-called gain on sale -- according to analysts including Paul Miller, managing director at FBR Capital Markets Corp. in Arlington, Virginia. The gain on sale that accrues when a loan is sold to a third party for more than its previous value was 2.36 percent for Wells Fargo in the first quarter, compared with 1.9 percent in the fourth quarter, Chief Financial Officer Timothy J. Sloan said April 1

Gain-on-sale margins may be in line with the first quarter, if not higher, Miller wrote in a June 18 report, based on the firm’s industry contacts.

“We look for strong gain-on-sale margins to be carried into 3Q12 given high volumes and the lack of capacity in the market today,” he said.

Lenders are being helped by a June 21 Federal Reserve pledge to extend by $267 billion a bond-buying program to replace short-term securities with longer-term debt -- a $267 billion bid to sustain the cheapest home-loan rates on record.

A deepening of the European debt crisis also will keep international “panic money” invested in U.S. mortgage bonds at least through September, said Gumbinger of HSH.

Europe Crisis

The average rate for a 30-year fixed mortgage fell to 3.62 percent in the week ended today from 4.08 percent in March, according to Freddie Mac. It’s the lowest in the McLean, Virginia-based mortgage-finance company’s records dating to 1971, as investor concern grew that Europe’s debt crisis was worsening, which bolstered demand for U.S. government bonds.

Homeowner refinancing damages investors in mortgage bonds trading for more than face value by returning their principal faster at par and curbing interest. Still, the pace has failed to exceed the levels that holders braced for last year, and the same demand for safe assets from Europe’s sovereign fiscal crisis has benefited government-backed mortgage securities.

The debt returned 1.11 percent last quarter, bringing gains for the first half to 1.72 percent, according to Bank of America Merrill Lynch’s Mortgage Master index. The quarterly returns were the best since the third period of last year, when the debt produced 2.32 percent.

Deficient Loans

Despite the additional revenue banks are getting as middlemen in the government’s housing programs, they are at risk if Fannie Mae, Freddie Mac and the Federal Housing Administration later seek to force lenders to buy back deficient or soured loans, Christopher Kotowski, an analyst at Oppenheimer & Co. in New York, said in a telephone interview.

“You’re asking the banks to be the feet on the street to distribute this government-subsidized product,” he said. “The whole business is more trouble than it’s worth.”

Banks have responded by tightening lending standards. Properties being refinanced typically need to be valued at a level that gives homeowners 20 percent equity, or else borrowers need to purchase costly mortgage insurance. Credit-score standards are strict, and debt levels usually are capped at the most conservative levels in more than a decade.

“It’s incredible trying to get a refi -- they put you through the wringer,” said Joanne Lee, a nutritionist in Weymouth, Massachusetts, who has refinanced her home loan three times in the past three years to catch lower rates, without using a federal program. “We’ve had to provide a stack of paperwork, and fax and re-fax documents again and again.”

Mixed Results

Government programs to bolster the mortgage market so far have had mixed results. When President Barack Obama announced the Home Affordable Modification Program, or HAMP, in 2009 he set a goal of 3 million to 4 million renewed loans by the end of 2012. Only 801,538 have been permanently modified, and more than half of one-year-old modified loans have re-defaulted, according to government data. The program pays servicers bonuses of about $2,000 to modify loans.

Still, the U.S. housing market is showing signs of recovery. While home values in 20 U.S. cities fell to the lowest level in a decade in March, the decrease from the prior month was the smallest since the beginning of the housing boom, according to the S&P/Case-Shiller index. Pending home resales climbed 5.9 percent in May, matching a two-year high reached in March, the National Association of Realtors said. Sales of new houses rose a seasonally adjusted 7.6 percent in the same month, according to the Commerce Department.

“The government is trying to stuff everyone they possibly can through some sort of refinance program because it puts families on firmer footing financially, and that’s a boost to the economy when people can spend,” said Gumbinger of HSH. “Whether it works remains to be seen.”


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