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Originally published Thursday, July 5, 2012 at 10:14 PM

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Low interest rates, refinancings a boon to U.S. mortgage lenders

With fixed U.S. mortgage rates falling to record lows of 3.62 percent on a 30-year loan and 2.89 percent on a 15-year, as reported by mortgage buyer Freddie Mac on Thursday, prospective buyers and refinancers have more incentive to brave a modestly recovering housing market, and banks attract new and repeat customers.

Bloomberg News

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BOSTON — The biggest U.S. mortgage lenders, whose first-quarter earnings were buoyed by gains on home-loan refinancings, are raking in more profits as record-low interest rates and government efforts prolong the boom.

With fixed U.S. mortgage rates falling to new lows of 3.62 percent on a 30-year loan and 2.89 percent on a 15-year, as reported by mortgage buyer Freddie Mac on Thursday, prospective buyers and refinancers have more incentive to brave a modestly recovering housing market.

Revised federal programs making it easier for homeowners to lock in lower rates helped push the Mortgage Bankers Association refinancing index to a three-year high last month. That signals a windfall for banks including Wells Fargo that renewed about 5 million loans in 2011 amid the Federal Reserve's drive to keep borrowing costs near zero. Wells Fargo is the nation's largest home lender.

Refinancings probably rose 4.2 percent to $275 billion in the quarter ended last week, the bankers' group forecast, three months after saying the boom was over. About 5.6 million loans will be refinanced this year, said Keith Gumbinger, vice president of HSH Associates, a mortgage-research firm.

"We keep refinancing and coming up with new programs to get to the bottom of the housing market," said Nancy Bush, an analyst and contributing editor at SNL Financial, a bank-research firm. "This fits into the general narrative that we are not yet out of the market aberrations from 2008 and 2009." Government efforts are "pushing revenue" to the banks, she said.

Wells Fargo, based in San Francisco, posted $2.87 billion in mortgage-banking income in the three months ended March 31, the most since the final quarter of 2009, according to the bank's statements. JPMorgan Chase set a record for home-loan production income amid gains from the federal Home Affordable Refinance Program, or HARP.

While a boon for banks, the Obama administration's housing policies and Federal Reserve Chairman Ben Bernanke's cheap cash also are giving consumers the chance to save as much as $14 billion a year. The average borrower saves about $2,500 a year in a loan renewal, said Mark Zandi, chief economist at Moody's Analytics.

The government last year eased standards for HARP, giving Fannie Mae and Freddie Mac borrowers an opportunity to refinance no matter how little equity they have in their homes. Wells Fargo Chief Executive Officer John Stumpf told analysts in May that the lender's origination volume has been helped by HARP.

"I suspect there will be continued volume there," Stumpf said.

A federal program that went into effect June 11 attempts to bolster refinancing of FHA mortgages. The so-called Streamline program allows people with existing FHA mortgages to refinance without credit checks, home appraisals or minimum income requirements.

The government refinancing index more than doubled in the week ended June 15. It dropped 21.5 percent for the week ended June 29.

"We expect high customer demand for this product," said Vickee Adams, a Wells Fargo spokeswoman. The bank started accepting FHA Streamline applications on June 19 and has more than 500,000 customers who may qualify, she said.

A deepening of the European debt crisis also will keep international "panic money" invested in U.S. mortgage bonds at least through September, said Gumbinger, of HSH.

Despite the additional revenue banks are getting as middlemen in the government's housing programs, they are at risk if Fannie Mae, Freddie Mac and the Federal Housing Administration later seek to force lenders to buy back deficient or soured loans, said Christopher Kotowski, an analyst at Oppenheimer & Co.

"You're asking the banks to be the feet on the street to distribute this government-subsidized product," he said. "The whole business is more trouble than it's worth."

Banks have responded by tightening lending standards. Credit-score standards are strict, and debt levels usually are capped at the most conservative levels in more than a decade.

"It's incredible trying to get a refi — they put you through the wringer," said Joanne Lee, a nutritionist in Weymouth, Mass.

Still, the U.S. housing market is showing signs of recovery. While home values in 20 U.S. cities fell to the lowest level in a decade in March, the decrease from the previous month was the smallest since the beginning of the housing boom, according to the S&P/Case-Shiller index.

Pending home resales climbed 5.9 percent in May, matching a two-year high reached in March, the National Association of Realtors said. Sales of new houses rose a seasonally adjusted 7.6 percent in the same month, according to the Commerce Department.

"The government is trying to stuff everyone they possibly can through some sort of refinance program because it puts families on firmer footing financially, and that's a boost to the economy when people can spend," said Gumbinger of HSH. "Whether it works remains to be seen."

Material from The Associated Press

is included in this report.

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