Capacity constraints in the mortgage banking industry have been holding down prepayment speeds despite the pickup in HARP refinancings in the first quarter, according to analysts at Bank of America Merrill Lynch.

Employment in the mortgage banking sector is at a 10-year low and employee “productivity hit new lows” in 2011.

The average employee processed $4.73 million in loans in 2011. That rose slightly to $4.8 million per employee in the first quarter of this year, according to a BofA Merrill MBS strategy report.

“Obviously, total [loan] production is way down as a result of low employee headcount in the industry and low productivity,” the June 1 report says.

During the great refinancing boom of 2003, the average employee processed $8.5 million in loans.

Meanwhile, the government reported on Friday that the expanded Home Affordable Refinance Program really picked up in the first quarter. HARP 2.0 refis nearly doubled from the fourth quarter to 180,000 in the first quarter, including 80,000 refis in the month of March alone.

“We expect this pickup to continue into the May numbers, reflecting the servicer efficiencies as the program matures,” the BofA Merrill analysts write.

Analysts at Keefe, Bruyette & Woods noted that HARP refinancings totaled 16% of Fannie Mae and Freddie Mac refinancing volume in the first quarter and they expect HARP activity will “remain evaluated.”

The June 3 KBW report also points out that the recent decline in interest rates “should also drive a pickup in organic refinancing activity. As a result, while overall volumes should increase, the HARP percentage might stay the same, or potentially decline.”

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