Competition Fierce, Profits Ample for Harp 2.0 Refis: Fifth Third

Competition is heating up among banks in the government's revised Home Affordable Refinance Program, which has helped spark a refi boom and contributed to strong mortgage profits at most banks.

"We've been pretty aggressive" with direct mail solicitations and newspaper ads, says Bob Lewis, a senior vice president and the head of mortgage lending at Fifth Third Mortgage. His loan officers also are combing through files and encouraging past customers to refinance if they haven't already.

The unit of $117 billion-asset Fifth Third Bancorp (FITB) in Cincinnati was the sixth-largest Harp lender in the first quarter. Refinancings through Harp 2.0 now make up 49% of the bank's total refinancing volume, Lewis says.

The bank's first quarter originations resulted in gains of $174 million on mortgages sold to Fannie and Freddie, a 180% increase from gains of $62 million in the first quarter a year earlier.

Lenders were given plenty of sweeteners to participate in Harp 2.0, and critics have argued that rather than offering the lowest interest rates possible, these lenders are raking in outsized profits.

Lewis says the program has been quite profitable for lenders, but that this reflects the vagaries of the market.

"Everybody's stealing it," Lewis says, referring to gain on sale margins. "Several things go into that activity. Rates have moved around over the last six months, in a 50 basis point range, and that can create opportunities when you're selling to the secondary market."

The purpose of Harp 2.0 was to expand access to refinancing so underwater borrowers with loan-to-value ratios greater than 125% could take advantage of low interest rates and lower their monthly mortgage payments, reducing the potential for strategic defaults.

Still, Lewis framed the issue as one in which banks are simply doing their part to aid the housing recovery.

"We see it as an opportunity to help the communities in our footprint and help consumers maintain homeownership in a challenging environment," he says. "I don't know if it's helping the housing market recover but if borrowers get more affordable payments, there will be fewer foreclosures and the glut of inventory on the market will decline."

Volume of Harp 2.0 refinancings has been so high that some large lenders, lacking capacity to handle so many requests, are tightening underwriting just to keep from being inundated. For example, Wells Fargo (WFC) has capped loan-to-value ratios at 105% for loans it does not service itself.

Fifth Third is bucking that trend. It accepts borrowers with LTVs as high as 150% LTVs — and may go even higher.

"We're confident at 150%," says Lewis. "We selected 150% as a starting point and will evaluate this continually and explore it going forward."

Lenders are in stiff competition for refinancing largely because the revised program removed the liability for buyback requests from Fannie and Freddie. Borrowers also are not required to get a new appraisal on their home, a major impediment to past attempts to aid consumers who owed more on their mortgage than their home is worth. Also, lenders are required to verify employment only on refis of loans they already service.

Lewis called the release from liability for repurchases "really huge," though he admits there are "challenges" for lenders that refinance loans currently held by another servicer. Still he thinks refis could remain strong over the life of the program, which was extended through next year.

He also praised the revised program for allowing borrowers to transfer private mortgage insurance policies from one lender to another.

"We were an aggressive Harp lender, we worked out our own portfolio pretty well and so one of our bigger opportunities is going to be with the open access because borrowers can choose the lender they want to deal with," Lewis says.

Fifth Third's mortgage banking revenue doubled in the first quarter to $204 million from a year earlier. Mortgage originations jumped 64% to $6.4 billion.

Lenders "have built big pipelines, including us, and baring any economic or world-changing activity, rates could stay down for a while," Lewis says.