Obama Gives Bank of America a Hand: Analyst (Update 1)

Story updated with mortgage putback loss estimates for more banks and additional loss severity information for key loan servicers.

NEW YORK ( TheStreet) -- Bank of America ( BAC), JPMorgan Chase ( JPM), other mortgage loan servicers and even mortgage insurer MGIC ( MTG) could see "an upside surprise" from President Obama's expanded mortgage refinance program, according to an analyst.

Edward Mills of FBR Capital Markets said in a report Monday morning that investors holding shares of the large mortgage servicers, including Flagstar Bancorp ( FBC) and First Horizon National ( FHN), could benefit from the Federal Housing Finance Agency's expanded home refinance plan, "if the program is very explicit in waiving representation and warranties risk for servicers of legacy mortgages."

President Barack Obama

The Federal Housing Finance Agency, or FHFA, is the regulator for Fannie Mae ( FNMA) and Freddie Mac ( FMCC), the government-sponsored mortgage giants that were place under government conservatorship in September 2008.

The White House has pushed for the regulator to expand its Home Affordable Refinance Program, or HARP, so that borrowers with mortgages held by Fannie and Freddie -- representing roughly half of all U.S residential mortgage loans -- will be able to refinance their entire loan balance at today's historically low rates, regardless of how much value the underlying home has lost since the loan was originated.

Under HARP, borrowers are limited to refinancing up to 125% of a home's current market value, but with millions of borrowers seeing values drop 50% or even more since taking out mortgage loans at the peak of the real estate crisis, even that generous loan-to-value limit isn't enough. Early next year, the 125% loan-to-value limit will be lifted.

The FHFA is set to release on Tuesday details on the expanded HARP, including underwriting requirements and release of certain liabilities for the large loan servicers.

The expanded HARP will also feature the waiver of risk-based fees for borrowers who go with shorter terms for the refinanced loan. Not only will the borrowers save on the fees if they go with a 15-year fixed mortgage loan rather than a 30-year term, they will enjoy lower rates.

Bank of America, for example, on Monday was offering a 30-year fixed rate of 4.25% with a fee, or "points," of 1.125% paid up front for a $200,000 mortgage loan refinancing, while the 15-year rate with the same points, was 3.625%.

In the FBR report, Mills said that "if the legal liability release is explicit to the point where servicers feel there is a meaningful release from repurchase claims, we would anticipate lenders to mine their servicing portfolios and actively push borrowers to refinance."

That of course, would benefit not only the servicers, who would benefit from new fees paid by borrowers for the refinancing, the sales premiums earned if the new loans were quickly sold to Fannie or Freddie, and the ongoing servicing fees paid by Fannie or Freddie, but would benefit the entire U.S. economy as borrowers had their monthly housing expenses cut.

Mills said that "without a doubt," Bank of America would be "the servicer to most benefit by an upside surprise in the HARP 2.0 program," especially because of "its legacy Countrywide exposure." Bank of America acquired Countrywide in 2008, and most of the company's ongoing struggles with mortgage putback demands spring from inherited liability for Countrywide's loan securitizations.

FBR estimates that Bank of America's total mortgage putback losses will total $40.19 billion, including $12 billion for Fannie and Freddie repurchase claims. JPMorgan's losses have totaled an estimated $21.17 billion.

For Wells Fargo ( WFC), FBR estimates total mortgage representation and warranties losses of $6.41 billion, while Citigroup's putback losses total and estimated $4.76 billion.

Moving past the "big four" mortgage loan servicers, FBR estimates total mortgage putback losses to date of $2.42 billion for SunTrust ( STI), $1.8 billion for Capital One Financial ( COF), $1.74 billion for Morgan Stanley ( MS), and $1.25 billion apiece for PNC Financial Services Group ( PNC) and First Horizon National ( FHN).

FBR's loss estimates include loses already booked and remaining estimated mortgage repurchase losses on loans sold to Fannie and Freddie, loans securitized and sold privately, and loans originated through Federal Housing Administration programs.

Frannie/Freddie loans originated from 2005 through 2008 made up just over half of the loan originations that FBR used for its loss estimates, and First Horizon had the highest estimated loss rate for loans sold to the government-sponsored enterprises, at 1.9%.

Mills said that expectations for the expanded HARP "are already very low and any positive headlines from the revised program could have a positive impact on the stocks most levered to mortgage reps and warranties."
Philip W. van Doorn is a member of TheStreet's banking and finance team, commenting on industry and regulatory trends. He previously served as the senior analyst for TheStreet.com Ratings, responsible for assigning financial strength ratings to banks and savings and loan institutions. Mr. van Doorn previously served as a loan operations officer at Riverside National Bank in Fort Pierce, Fla., and as a credit analyst at the Federal Home Loan Bank of New York, where he monitored banks in New York, New Jersey and Puerto Rico. Mr. van Doorn has additional experience in the mutual fund and computer software industries. He holds a bachelor of science in business administration from Long Island University.