Bank of America Corp., already lagging its peers, will probably fall further behind in helping borrowers with little or no home equity to refinance as the U.S. government loosens rules for the federal Home Affordable Refinance Program, according to Morgan Stanley analysts.
Prepayment speeds for the high-rate mortgages serviced by Bank of America and targeted by HARP are already running at levels that retire as much as 15 percent less of the debt each year than similar JPMorgan Chase & Co.-managed loans, the analysts said in a report. They recommended bets benefiting from relatively slow refinancing among loans overseen by Charlotte, North Carolina-based Bank of America in their top five 2012 "investment themes" for government-backed mortgage bonds.
Servicers including JPMorgan Chase and Wells Fargo & Co. have "shown remarkable efficiencies around HARP," the New York-based Morgan Stanley analysts led by Vipul Jain and Janaki Rao wrote yesterday. "Other servicers like BofA who have not built that capacity so far are unlikely to do so."
Bank of America's participation in the program may determine how successful the expansion urged by President Barack Obama of HARP is, Barclays Capital and Nomura Securities International Inc. analysts have also said.
The bank, which oversees about a quarter of mortgages targeted by the initiative, could about double the aggregate increase in prepayment speeds resulting from HARP changes if it is "willing to aggressively participate," Morgan Stanley said.
HARP, which started in 2009, covers loans guaranteed by government-supported Fannie Mae and Freddie Mac. The program's revamp, which began this month, is meant to help more homeowners take advantage of interest rates at about the lowest on record by removing restrictions on how much they can owe relative to their homes' values, reducing lenders' risks and cutting fees.
Bank of America has already incorporated the reduced upfront fees charged on riskier loans by Fannie Mae and Freddie Mac under the HARP expansion into its lending, and "we're working really hard on implementing the other guideline changes as soon as we can," Terry Francisco, a spokesman for the lender, said today. "We're very committed to HARP 2 and expect to do at least 100,000 originations under it."
The bank refinanced about 254,000 mortgages under HARP before the adjustments, compared with a reported total for all lenders about 900,000, he said. Obama initially projected in 2009 that the initiative could reach 4 million to 5 million.
Barclays Capital mortgage-bond analysts, including Derek Chen and Nicholas Strand, said in a Nov. 21 report that "while Bank of America has the potential" to significantly bolster the program's use, "it is unclear why it would change its policy dramatically under HARP 2.0."
The lender "is still primarily focused on managing credit risks rather than increasing production," and may expose itself to higher costs from mortgages with flawed underwriting if it refinances loans originally made by Countrywide Financial Corp., a lender it now owns and could potentially put into bankruptcy, they said.
Mortgage-bond investors often benefit when borrowers with high-rate loans can't refinance because their securities trade for more than face value. When homeowners refinance, the bonds get repaid at par.