HARP 2.0 improving bank gain-on-sale margins
Analysts at Keefe, Bruyette & Woods say the strong start to Home Affordable Refinance Program 2.0 bodes well for mortgage banking volumes and margins in the second quarter, with PHH Corp. (PHH) benefiting the most.
“We view these results positively for the rest of the industry,” the analysts say.
The increase in HARP volume, mortgage applications and higher interest rate lock commitments created stronger than expected gain-on-sale margins, or the amount banks realize after selling loans to the secondary market. And since most originators book the bulk of their gains at the time of rate lock, an increase in applications effectively front-loaded mortgage banking earnings.
Most companies reported increased GOS margins of 50 to 100 basis points from the fourth quarter, with Bank of America (BAC), up 377 bps, a strong exception. “The sharp increase for BofA primarily reflects the very high percentage of HARP volume as a percentage of its refinance activity,” KBW says.
The analysts also cite industry capacity constraints as a cause of the increased margins, a result of large mortgage companies such as BofA meaningfully reducing their origination capacity.
Bottom line mortgage servicing results were mixed, driven largely by hedge results, the analysts say. However, mortgage servicing rights valuations are up (on average less than 10 bps), driven by the increase in interest rates through the first quarter.
New and outstanding repurchase claims were driven by the GSEs, with BofA experiencing a major increase in outstanding claims, while new claims declined modestly. BofA’s case is unique given the company's ongoing conflict with Fannie Mae. More than $16 billion in claims are still outstanding at the bank, and more than half come from Fannie Mae and Freddie Mac.
Between the first and fourth quarters of 2011, total outstanding claims grew from $11.8 billion to $12.6 billion, spiking 26% in the first three months of 2012.
KBW analysts say bank earnings to date suggest mortgage volume is likely to rise slightly in the first quarter versus the fourth. Most originators showed an increase; the exceptions were Bank of America and Citigroup (C). Most industry forecasts were for declining volumes.
The Mortgage Bankers Association forecasts first-quarter volume of $318 billion, down from $361 billion in the fourth quarter. And Fannie Mae recently increased its forecast to $375 billion from $327 billion for the quarter, down from $411 billion in the fourth quarter.
"The stronger than expected volume reflects continued strong refinance activity given the low rate environment and an increase in HARP volume,” analysts say.
The image below shows a breakout of gain-on-sale margins by bank.