The number of homes refinanced under the new and improved Home Affordable Refinance Program (HARP) nearly doubled in the first quarter of 2012. That should benefit mortgage REITS that invest in government guaranteed mortgages, such as AG Mortgage Management (MITT), Hatteras Financial (HTS), American Capital Agency (AGNC), and Annaly Capital Management (NLY).
Stocks from mREITs like these should see a small boost in profits from this news. Even though the volume of refinances under HARP 2.0 has nearly doubled, the number is still very low. Around 180,000 mortgages were refinanced under the program in the first quarter, compared with around 93,000 in the last quarter of 2011.
The number of refinances does seem to be refinancing dramatically - around 80,000 HARP refinances were completed in March. The reason for this increase appears to be new mortgage refinancing software written expressly for HARP. The New York Times reported that the Federal Housing Finance Agency (FHA) only made the program fully available at that time.
These numbers show that the refinancing business is getting a dramatic boost, which should increase the volume of business at mREITs. This should also increase their cash flow and profits. Also increased will be the amounts that those companies can leverage.
The major factor holding the number of HARP refinances down is the requirement that homeowners be current on their mortgage payments. Many underwater homeowners have had a hard time meeting mortgage payments because of the dismal economy.
Homeowners Still Having a Difficult Time Refinancing
The main obstacle to continued mREIT growth appears to be the difficult time that underwater homeowners are having applying for refinancing. The New York Times reported that some owners have had to go to as many as six lenders in an attempt to find refinancing.
The newspaper also reported that lenders are using almost any excuse to turn down underwater homeowners. Some banks, including Bank of America (BAC), JPMorgan Chase (JPM), and Citigroup (C), are only providing HARP refinancing for their own customers.
That should be an opening for REITs, such as Anworth Mortgage Asset (ANH) and MFA Mortgage Investments (MFA), to expand their market share. Many homeowners have to turn to smaller independent lenders and brokers in order to get HARP refinancing. Such smaller lenders will be more willing to work with non-traditional underwriters such as mREITs.
HARP could also increase the number of non-federally guaranteed mortgage refinances because it will get people to go the mortgage broker. Homeowners who can't qualify for HARP (which only applies to Fannie Mae and Freddie Mac Mortgages) can often qualify for a non-guaranteed refinance. Many people with federally guaranteed mortgages may get fed up with all the paperwork and opt for simpler non-guaranteed loans.
The success of HARP 2.0 could benefit all mREITs that invest in residential mortgages. Those REITS that are more willing to invest in unusual or riskier mortgages, such as Chimera Investment Trust (CIM), could be in a position to see substantial gains in profit and market share.
Foreclosure Sales Increase Should Boost mREITs
The number of foreclosed homes sold in the United States increased by 25% in the first quarter of 2012, the listing firm RealtyTrac reported. Around 233,299 foreclosed homes were sold in the first four months, which means that 26% of all home sales in the United States in that period were foreclosures.
This could benefit mREIT stocks in two ways. First, a large percentage of foreclosure sales are short sales, which involve short-term mortgages. These are likely to be issued by nontraditional lenders such as mREITs. Second, those homes are being put back on the market, which should increase house sales and the number of mortgages issued. The result of this should see an increase in the volume of business for mortgage REITS, including major players such as Annaly and American Capital Agency.
The reason why 15-year and other short-term mortgages are so attractive to foreclosure buyers is obvious. The average sale price for a foreclosure is 27% below the average price for a similar home.
Home Sales Slowly and Steadily Growing
The number of home sales in the country is slowly increasing, which means that the volume of mortgages being issued is slowly increasing as well. That means the potential market for mREITs, which are now the biggest players in the mortgage game, is also slowly increasing. The National Association of Realtors reported that overall home sales rose by 3.4% in April.
These figures were collected before May's dismal economic news, so they may be no longer accurate. Still, it does appear that the housing market is slowly recovering. That means mREITs should face a steadily and slowly growing market in the next few years. That should translate into steady, if not spectacular gains in value and earnings per share for well-managed mREITs.
Dismal Unemployment Figures Could Threaten mREIT Stock Growth
The biggest potential threat to REIT stock values is the same one that has the rest of the stock market spooked - the dismal employment rate. The U.S. Bureau of Labor Statistics reported that the unemployment rate stayed put at around 8.2%. This means that there was no significant job growth.
To make matters worse, the numbers of the long-term unemployed and the underemployed - the two groups of people least likely to take out a mortgage -increased slightly in May. The number of long-term unemployed increased from 5.1 million to 5.4 million during that period. The number of people working part-time because they can't find a regular job increased from 2.2 million to 2.4 million.
If that wasn't bad enough, the number of hours that employees are working also fell in May. The average full-time employee worked 34.1 hours a week in May, which was down by .10 hour. Obviously, a person working fewer hours will be bringing home less money. Factory overtime also declined in May, which signals lowering manufacturing output.
These figures indicate that there are fewer people in the U.S. who are in a position to take out a mortgage and buy a home. That also means that there are more people having trouble meeting their mortgage payments.
That will obviously translate into lower profits for mREITs, particularly those that buy up riskier mortgages. Newcastle Investment (NCT), which buys up paper on manufactured or mobile homes and other riskier properties, could one of the first mREITs hurt by falling employment rates.
One result of the employment statistics could be that banks and other mortgage lenders start tightening up lending standards. They would do this out of fear of a new wave of foreclosures. Tighter lending standards would mean fewer refinances and new mortgages and less business for mREITs.
The employment figures could also drive some more business to mREITs. Families that don't see a recovery on the horizon will start belt-tightening. Part of that belt-tightening is likely to be refinancing in an attempt to cut mortgage payments. Even a slight increase in the amount of refinancing could increase profits at some companies.
One company that is in an excellent position to benefit from increased refinancing in a bad economy is PennyMac Mortgage Investment Trust (PMT). Companies like PennyMac have the flexibility to refinance homeowners with lower credit ratings and other problems. That means they could increase their business even as the unemployment rate sinks.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.