Refinance Boom Benefits Borrowers and Big Banks

by Diana Olick

Millions of Americans are saving billions of dollars in monthly mortgage payments, thanks to record-low interest rates.

The refinance market is booming, now at 78 percent of residential mortgage activity, according to the latest read from the Mortgage Bankers Association.

Make no mistake, however, the big banks are reaping great rewards as well.

“Mortgage origination profitability is off the charts,” says Paul Miller, head of financial research at FBR. “Refis are surging, and many are loans that just refi-ed 6-12 months ago.”

Given that so many of the refis are of relatively new loans, the banks are taking a loss in the servicing, but Miller says they usually hedge their servicing assets. The hedges, however, are not perfect and values “bounce around” in big refi booms, so the banks will take some write downs in servicing, “but the hedges will cushion the value changes,” Miller adds.

Juicing the refinance market as well are big changes to the government’s Home Affordable Refinance Program earlier this year. HARP allows borrowers with Fannie Mae and Freddie Mac loans to refinance even if they owe more on the mortgage than the home is worth (so-called “underwater” loans). The changes dropped any limit to how much negative equity a borrower has in the home. It also lowered some costs. HARP volumes doubled to 180,000 in the first quarter of this year from the previous quarter, according to the FHFA. That, too, has helped the big bank servicers.

“It’s hard to tell how many borrowers refi with their current servicers, but the share is up, given the demise of mortgage brokers and the advent of programs like HARP that favor the current servicer,” says Guy Cecala of Inside Mortgage Finance.

Next week the FHA, the government’s mortgage insurer, will institute changes to its refinance program for current FHA borrowers, lowering fees and premiums. That should increase volumes further.

While big banks may be profiting from the refinance surge, some can’t handle the volumes. It can take far longer to refinance at a larger bank than a smaller lender.

“There are major staffing issues, 90-plus days for a refi at the big banks. That’s why middle market banks are doing the majority,” says Craig Strent, CEO of Bethesda, Maryland’s Apex Home Loans, a local direct lender. Wells Fargo, the nation’s largest lender, Strent admits, is the most efficient and has made it clear they want retail mortgage business. Bank of America is far less aggressive.

“Most major banks are getting all the refi business they want, and can handle, at least for now,” notes Guy Cecala. “On the plus side of the surge in refi activity is that it generally improves the quality of mortgages—and servicing—since the new loans are run through tougher underwriting and often have more equity.” 

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