JPMorgan Chase has found some fresh legs to extend its mortgage-refinancing run.
The second largest home lender plans to eke out every last profit from the government's Home Affordable Refinance Program for underwater borrowers and is licensing new technology to improve its mortgage operations.
Chase plans to offer HARP refinancings to the hundreds of thousands of customers it acquired with MetLife's $70 billion servicing portfolio late last year. Such business is low-hanging fruit at a time when banks are trying to figure out what to do when the flow of refis dries up, as is widely expected to happen in the second half of 2013.
Kevin Watters, JPMorgan's new head of mortgage banking, wants to keep Chase on the refi gravy train as long as possible. "There are still lots of folks who weren't Harped," he says. "There's a large population of people whose current servicer may not have put the same emphasis on refinancing."
JPMorgan also recently entered into an agreement to license Quicken Loans' proprietary loan origination platform. Quicken Loans, based in Detroit, topped J.D. Power and Associates' customer satisfaction rankings for the past three years.
"We looked at the customer experience and saw that Quicken was rated No. 1 and we're No. 4, and we want to be No. 1 so we sought out the best system," said Watters, a 13-year JPMorgan veteran, who has run the bank's home lending group for the last two years.
The loan origination platform will allow Chase to speed the mortgage process and close loans more quickly, Watters says. Big banks have been inundated with refinance applications since January 2012 and have taken 60 to 90 days to close loans. Quicken Loans has among the shortest average closing times at about 30 days.
"Customers should see shorter cycle times," Watters said. "This will help with the workflow and how the loan is processed."
For more than a year, banks have enjoyed record gain-on-sale margins as persistently low interest rates led to a flood of demand for refinancings, particularly from underwater borrowers whose loans are guaranteed by Fannie Mae or Freddie Mac.
HARP 2.0, announced by the Obama administration in October 2011, created a huge refinancing wave because appraisal requirements and lender representation and warranty liabilities were waived by the Federal Housing Finance Agency, which oversees Fannie and Freddie.
Watters agrees with the forecasts that refis will drop in the second half, and supports a bill in Congress that aims to increase competition for refis among mortgage servicers.
JPMorgan credits Watters with helping the bank return to profitability in mortgages. He succeeded Frank Bisignano, who took over the mortgage unit in February 2011 and was promoted to co-chief operating officer at JPMorgan Chase in July.
The bank's mortgage originations rose 33% in the fourth quarter to $51.2 billion from a year earlier. Income from its mortgage production nearly quadrupled to $789 million. With the MetLife acquisition, JPMorgan's servicing portfolio rose by more than 5% to $1.1 trillion.
Kevin Barker, an analyst at Compass Point Research & Trading, says it makes sense for Chase to refinance as many Harp loans as possible because mortgage lenders can "effectively name their price" when refinancing loans in their own servicing portfolios. The average gain-on-sale margin from selling loans in the secondary market has jumped 75% over 2011 levels, he says.
"HARP refinances are far and away the most profitable mortgage originations in the market right now," Barker says. "It makes sense for Chase to continue to acquire high-quality mortgage servicing rights especially with margins being so wide."
Though forecasts call for mortgage lending to drop by as much as 40% by 2014, all of the big banks have been hiring more personnel, including JPMorgan. That shift means the industry could expect more competition and a contraction in gain on sale margins in the second half of 2013, Barker says.
Still some bankers say refinancings could remain strong if interest rates stay at current levels.
"I still think there are a lot of people out there who refinanced at 5% or 4.5% and they may jump back in," says Russ Tucker, a senior vice president at Investors Home Mortgage, a subsidiary of $11.4 billion Investors Bank in Short Hills, N.J. "There are also people who have not been able to refinance for a variety of reasons, there is still probably a healthy supply of those in my view. The return of the purchase market is something we all hope for but I don't see a dramatic change in 2013."