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FBR: Some 6M Borrowers May Qualify for HARP

While ""FHFA"":http://www.fhfa.gov/ reported a month-to-month drop in HARP refinances, volume under the program remains high, with numbers in the first half of the year (more than 519,000 as of the end of July) already outshining all of 2011's HARP volume.

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Given the government's estimate that up to 4 million loans could be eligible under the program and ""FBR's"":http://www.fbr.com/ expectation that approximately 6 million borrowers may qualify, the firm expects that originators will continue to see strong volume in the near future.

""Accordingly, we believe that banks with strong origination platforms should continue to outperform peers, especially as elevated volumes, low rates, and constrained capacity provide a significant tailwind to earnings,"" FBR said in its report.

""We continue to recommend investors move away from banks whose earnings are sensitive to falling asset yields and toward those with meaningful exposure to origination and servicing businesses as they will be better able to weather the lackluster economic environment,"" analysts added.

In addition, high-LTV (loan-to-value) refinancings boosted activity. As HARP opened up to a wider range of borrowers, FBR expected volumes would be boosted further. In July, borrowers with LTVs greater than 105 percent made up more than half of HARP volume.

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In the second quarter, HARP refis with high LTVs represented more than 8 percent of total refinance volume, a large increase from 2 percent in the first quarter.

As of August 20, the Mortgage Bankers Association estimates $1.4 trillion in originations in 2012, and FBR expects more than that. With origination volumes at an elevated level, FBR recommended investment in companies with strong originatino platforms, such as PHH Corporation, Wells Fargo, PNC Financial Services, U.S. Bancorp, and Fifth Third Bancorp.

Interestingly, ""Fannie Mae"":http://www.fanniemae.com/portal/index.html has proven to be more active and accommodating in processing HARP loans than ""Freddie Mac"":http://www.freddiemac.com/. While volume may appear to be similar between the two GSEs, Fannie seems to be more accommodative across FICO scores, LTVs and for non-owner-occupied units.

FBR also believes Fannie has expanded its program to loans below 80 percent LTV, possibly opening it up to more borrowers.

Finally, FBR warned that reps and warranties exposure remains the main point of risk investing in banks with large mortgage origination platforms as the GSEs work to regain losses.

""This will likely remain a risk to originators well into 2013, and we expect repurchase requests and reserves to be lumpy as the GSEs continue to comb through loans at the full file level. That said, names that we continue to recommend are likely to be relatively underexposed to this risk as many are conservative underwriters and are well reserved for any increase in repurchase requests,"" FBR said in its report.

FHFA plans to release guidance related to reps and warranty claims. The firm reports that it anticipates a program that will provide greater scrutiny at the time of origination, greater clarity to originators, and a statute of limitations on most claims.

Though these guidelines apply only to new loans, they may provide relief for originators with legacy issues. However, FBR urges caution, as it expects FHFA's inspector general will continue to pressure the GSEs to recover as much as possible.

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