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Obama Gift to Banks Keeps on Giving

NEW YORK ( TheStreet) -- A government refinancing program intended to help underwater homeowners will boost bank earnings for a second straight quarter, and possibly into the third quarter, according to a report published Thursday by Citigroup analysts.

The retooled Home Affordable Refinance Program, known popularly in the mortgage industry as HARP 2.0, already gave bank earnings a lift in the first quarter, and will contribute to increasingly fat "gain on sale margins" for banks, analysts expect.
Bank of America has been an especially big beneficiary of the Obama Administration's retooled mortgage refinancing program.

Gain on sale margin essentially refers to the difference between the retail and wholesale cost of a mortgage. Let's say the loan costs the bank $100,000 to originate and the bank sells it for $106,000. That $6,000, or 6%, is the gain on sale (GOS) margin.

For HARP loans, the GOS margin is higher, according to an April 19 report from Keefe, Bruyette & Woods. KBW analysts argue that is the reason Bank of America (BAC - Get Report)'s gain on sale margins surpassed 6% while those of Wells Fargo (WFC - Get Report) were a comparably meager 2.36%. HARP accounted for 32.4% of the refinancings done by Bank of America in the first quarter, compared to just 16.2% at Wells Fargo.

One reason the margins are higher is that some banks are only accepting HARP for loans they originated themselves, according to the Citigroup report. Indeed, Bank of America and JPMorgan Chase (JPM - Get Report) confirmed they have policies of not allowing HARP for other banks' loans, as does Wells Fargo, according to report in The New York Times Wednesday, though Wells Fargo had no immediate response to an email seeking to confirm the report.

That's because they would face additional liabilities that they do not assume when refinancing their own loans. The Obama Administration supports legislation that would address this issue.

Gains on sale margins are also higher on HARP loans because they cannot be refinanced. Buyers of mortgage bonds and another mortgage-related asset called mortgage servicing rights will pay more if they know the homeowner isn't able to refinance, because it eliminates some of the risk their interest payments will cease prematurely.

Despite these factors, Wells Fargo CFO Tim Sloan downplayed the effect of HARP 2.0 on margins during the bank's first quarter earnings call.
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