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TheStreet Open House

Obama's HARP Is Music to Bankers' Ears

NEW YORK (TheStreet) -- For once, banks with exposure to mortgages can actually look forward to some earnings upside.

Nomura analyst Brian Foran expects the latest version of the government's Home Affordable Refinance Program -- dubbed HARP 2.0 -- to offer a major revenue tailwind to banks in the mortgage origination business , much bigger than the market is currently anticipating.

Refinancing volume is likely to rise with HARP now accounting for 20% to 40% of bank applications. Banks also stand to benefit from gain on sale of HARP loans, which command a stronger premium in the market.

In all, HARP could offer as much as $12 billion in mortgage banking revenue upside to the industry, according to Nomura, offsetting the negative impact of lower interest rates on interest income.

In October last year, the government revised guidelines to the HARP program. Borrowers with loans backed by Fannie Mae (FNMA)and Freddie Mac (FMCC) with a current loan-to-value ratio of 80% and above can get their loans refinanced, widening access to underwater borrowers who owe substantially more than their homes were worth.

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In the previous version, the program had a ceiling on the loan-to-value ratio at 125%.

The loan must have been sold before May 2009, the borrower must be current on their mortgage and must have made no late payments in the past six months.

Banks have reported a pickup in activity since the launch of the program, although the real surge in refinancing has kicked in only in March, when the industry moved to automated underwriting on these loans. HARP is particularly active in states where there are significant number of homes underwater including Arizona, Nevada and Florida. Refi volumes in these states are up 61%, 71% and 49% respectively in February over January, according to the report.

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Foran believes that the latest version of HARP could target as much as 1.5 million home loans in a base case scenario or even 2 million in a high case and that the government's estimate of 1 million loans might be conservative.

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