Analysis: Banks may not see hoped-for refinancing boom

NEW YORK (Reuters) - Bank executives hope that rates at historic lows will spark a mortgage refinancing boom that will rescue their profits, but with fewer Americans qualifying for new home loans, that may be wishful thinking.

Borrowers are evidently so hopeless that they are starting to hold back from even applying to refinance their mortgages: fewer Americans have applied for refinancing in the last three weeks even as rates reached fresh lows.

Collecting fee revenue from refinancing was the one part of banks' mortgage business that has remained relatively strong, providing temporary relief as overall loan demand remains weak and credit losses stay stubbornly high.

Analysts had been expecting a pickup in third-quarter refinancing after the first half of the year was slow. If refinancing volumes do not take off, the upshot could be weaker third- and fourth-quarter results, which could further pressure stocks including Bank of America Corp, Wells Fargo, JPMorgan Chase and Co and Citigroup Inc.

Some U.S. banks are still hopeful about a new refinancing wave. The average borrower from whom Wells Fargo collects payments could save 1 percentage point by refinancing his or her 30-year mortgage, Chief Financial Officer Howard Atkins told analysts at a conference last week.

"What that means is any homeowner that can refinance a mortgage loan should do so," Atkins said. The bank, which says it makes one in four U.S. mortgages, believes there could be a "very significant increase" in refinancing, similar to the pickup that buoyed mortgage banking revenues in the first half of last year, he said.

But homeowners do not seem to be playing along. The Mortgage Bankers Association said on Wednesday that its index of applications for refinancing home loans has fallen for three consecutive weeks, even as rates have fallen. Refinancing application volume is usually quick to respond to lower rates.

"The volume of refinancing has been shockingly low," said Tom Lawler, a former economist at Fannie Mae and founder of Lawler Economic & Housing Consulting.

Refinancing volume is still higher than its levels in the spring and winter, but not as high as in the first half of 2009.

EXHAUSTED

Explaining why borrowers are so apathetic is not easy, but there are a number of possible reasons. One is that 21.5 percent of homeowners were "underwater" in the second quarter, meaning they owe more than their home is worth. It is difficult for these borrowers to refinance.

Meanwhile, U.S. unemployment has hovered around 10 percent all year. The broadest measure of unemployment and underemployment, which includes workers not actively looking for jobs, and those who are not employed full-time and who wish to be, has hovered around 17 percent. These workers would also likely have trouble refinancing.

"It's awful hard to do that refi if you've: A) lost your job, or B) you're underemployed," said Andrew Carswell, associate professor of housing and consumer economics at the University of Georgia.

Dan Alpert, a banker at Westwood Capital, estimates that because of underwater homes and labor market problems, less than half the people who could save money by refinancing can actually qualify for a new loan now.

"We've exhausted the waves of refinancings," Alpert said.

Banks, meanwhile, are extremely wary of taking on new mortgage risk. They are asking for extensive documentation, and turning down a higher percentage of loans, so lower applications plus lower acceptances will likely translate to less refinancing revenue.

About 30 to 40 percent of mortgage refinance applications now will not be completed, estimated Ed Groshans, analyst at Height Analytics. That compares with fallout of about 15 to 20 percent in previous years, he said.

The mortgage business has been terrible for banks since 2007, as credit losses have ratcheted higher, but last year, refinancing was a bright spot. Banks made about $755 billion of refinancing loans in the first half of last year, compared with just $375 billion over the same period this year, according to data from Inside Mortgage Finance.

As refinancing slows, banks can earn extra money from servicing loans, or collecting payments from customers. But with defaults on loans still high, collecting payments is an expensive enterprise for banks.

"If investors thought mortgage revenues would rise this quarter, they might be unpleasantly surprised that mortgages aren't helping at all," said James Ellman, president of hedge fund Seacliff Capital.

(Reporting by Elinor Comlay; additional reporting by Dan Wilchins, editing by Matthew Lewis)