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Mortgage Servicers Boosted by HARP Extension

Stocks in this article: WFC NSM WAC XLF XHB FNMA FMCC

NEW YORK ( TheStreet) -- The Federal Housing Finance Agency, conservator of Fannie Mae (FNMA) and Freddie Mac (FMCC) said it will extend the Home Affordable Refinance Program (HARP) by another two years till 2015, sending shares of mortgage servicers higher.

FHFA director Edward DeMarco said the program was being extended so more borrowers can benefit from lower rates.

The program allows borrowers with government-backed mortgages with little or no equity in their homes to refinance at lower rates. Launched in 2009, it got off to a rocky start but gained momentum in 2012 after it expanded its access to include all borrowers no matter how deeply underwater they are.

As of January 2013, HARP had allowed more than 2.2 million borrowers to refinance. The FHFA does not provide any hard targets on how many borrowers it hopes to reach with the extension. "We are hopeful that a substantial number of eligible borrowers will participate in the program going forward," the statement said.

The FHFA will soon be launching a nationwide campaign to inform consumers of the extension and their options under the refinance program. For more on eligibility requirements, click here.

The program comes at a time when an estimated 10 million homeowners owe more than their homes are worth, though rising prices are pulling more and more borrowers out from under water.

The program's extension to 2015 also seems to take advantage of the Fed's promise to keep interest rates low until at least mid-2015.

Banks and servicers have been capitalizing on the success of the HARP program which has prompted a refinance boom. Banks with a big mortgage banking share such as Wells Fargo have made a hefty profit from selling loans refinanced under HARP to investors.

Fears that the boost from refinancing has largely played out weighed on the stocks, so the extension of HARP is likely to be good news.

Earlier this week, FBR Capital analyst Paul Miller reiterated his bullish stance on mortgage banks, arguing that there was still some steam left from refinancing.

"While many of the large servicers have refinanced a large portion of their HARP loans, smaller servicers are still playing catch-up as demand has exceeded capacity. We estimate that there are between $2T and $2.5T of mortgages that still have an economic incentive to refinance with current refi capacity standing at $1.2T to $1.3T," he wrote.

Mortgage servicers were rallying sharply on the news, with shares of Walter Investment Management (WAC) jumping 7% and Nationstar Mortgage (NSM) climbing more than 4% in afternoon trading.

"This kills the bear case" for Nationstar and Walter Investment, Sterne Agee analyst Henry Coffey said in a note. The analyst said the extension will add 40 cents per share to his 2014 earnings per share estimate for both companies.

-- Written by Shanthi Bharatwaj in New York.

Disclosure: TheStreet's editorial policy prohibits staff editors and reporters from holding positions in any individual stocks.

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