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.
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)'s gain on sale margins surpassed 6% while those of Wells Fargo ( WFC) 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) 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.
|Bank of America has been an especially big beneficiary of the Obama Administration's retooled mortgage refinancing program.|
"The margins that we've had have been good, but I think, generally, they've been a little bit overstated in the market in terms of media reports and the like," said Sloan. If KBW analysts are correct, that may be because HARP accounts for a relatively smaller percentage of refinancing activity at Wells Fargo than at other banks. Citigroup's report suggests investors looking to capitalize on the margins offered by HARP 2.0 shouldn't just look at the big banks, however. "A more stealthy way is through our coverage of specialty lenders that are increasingly boosting capacity and originations," the Citigroup report states. Stocks Citigroup recommends in this context are PennyMac Mortgage Investment Trust ( PMT) and Nationstar Mortgage Holdings ( NSM). Like Bank of America, Nationstar also saw GOS margins of 6% in the first quarter. That compares to the company's historical range of 3-4%, according to Citigroup. Twitter.