Mortgage Refinance Boom May Aid Banks

by Laurie Kulikowski found 03/25/09 at thestreet.com

Refinance Applications Up 41.5% Last Week: MBA. Mortgage refinancings are expected to pick up this year as consumers take advantage of record low interest rates, providing an incremental boost to banks still waiting for the housing market to rebound.

On Tuesday, the Mortgage Bankers Association increased its forecast for mortgage originations this year by $800 billion to $2.78 trillion. The organization said that 2009 could become one of the highest years on record for originations behind the housing boom years of 2002, 2003 and 2005 respectively.

Still, the boost in originations is expected to come primarily from borrowers refinancing existing loans as they take advantage of record low interest rates and other federal programs designed to prop up the decimated housing industry.

Mortgages on homes purchased are expected to decline this year to $821 million from $854 million in 2008, the Washington, D.C.-based organization said.

Kevin Fitzsimmons, an analyst at Sandler O'Neill & Partners expects mortgage fee revenue to be strong this quarter as a result of refinance activity.

"Any pre-tax pre-provision earnings they can get helps them offset the high credit losses," Fitzsimmons says. "It's a group that is very open and very on the lookout for any positives it can get."

Banks with large mortgage lending businesses such as JPMorgan Chase (JPM Quote - Cramer on JPM - Stock Picks), Bank of America (BAC Quote - Cramer on BAC - Stock Picks) , Wells Fargo (WFC Quote - Cramer on WFC - Stock Picks) and SunTrust (STI Quote - Cramer on STI - Stock Picks), to name a few, should be able to take advantage of the refinancing activity.

But given the massive credit losses and further writedowns that many large and mid-size banks are dealing with, "it's probably not enough to make a big difference, but I think it will be a welcomed development for the banks to have that boost in activity," Fitzsimmons says.

As the financial crisis lingers, banks' top lines are under pressure as the markets continue to be in flux, stifling balance sheet growth and limiting fee revenue, particularly from capital markets activities. Banks are also shoring up their capital levels to brace against securities losses and loans made in the heyday of the credit boom.

While banks, such as JPMorgan Chase, say they have indeed extended billions in credit recently, the still-tight credit markets are limiting their ability to make loans. Any loan that is made is likely to remain on a company's books until the securitization markets open up again.

"This level of originations will test the operational capacity of a number of mortgage banking firms for multiple reasons," said Mortgage Bankers Association's chief economist Jay Brinkmann said in a statement.

Brinkmann notes that the "reduced availability of warehouse lines of credit could limit the ability of a number of independent mortgage bankers to handle this volume in a short period of time." He also says that loan officers working out of retail branch offices could have "capacity burdens" as independent brokers have closed up shop in light of the housing downturn.

This time around lenders have also tightened lending policies and will be using closer scrutiny toward borrower documents and appraisals.

Additionally, loan servicers "already burdened with loan delinquencies and workouts are going to be faced with massive churn in their portfolios as old loans are paid off and new loans booked," he said.

Previous record years had large amounts of subprime and jumbo loans included in their totals, while originations in 2009 will be almost entirely Fannie Mae (FNM Quote - Cramer on FNM - Stock Picks) and Freddie Mac (FRE Quote - Cramer on FRE - Stock Picks) conforming loans, the Mortgage Bankers Association said.

Nearly 80% of the mortgage applications received last week were for fixed-rate refinance loans, according to the Mortgage Bankers Association.

BofA is hiring for the refinancing boom, according to Bloomberg. The Charlotte, N.C., company purchased Countrywide Financial last summer. Countrywide which got caught in the subprime lending crisis was once the largest independent mortgage lender.

John Jaye, an analyst at consulting firm Aite Group, points out that if borrowers are refinancing then they were most likely current on their mortgage payments to begin with and are already qualified as borrowers. That means banks will have fewer worries that borrowers are likely to default at some point, he says.

In addition, new originations will be driven by a lot of borrowers purchasing foreclosed properties on the cheap and that the official buying season -- typically in spring and summer -- has yet to begin, Jaye says.

"It does appear that it might be turning a corner," he says.

On the flip side, the refinancing activity does little to help those borrowers that are struggling to make their payments. Those borrowers are unlikely to take part of the boom, he says.

These days, "the mere fact that you missed a payment makes it difficult" to refinance, he says.