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Confirmed: HARP 2.0 Ripping Off Underwater Borrowers

The Wall Street Journal gets around to noticing that the latest version of HARP, the Home Affordable Refinance Program, has been manipulated by the leading mortgage servicers to trap their borrowers. And they add a bit of a twist. Because servicers set the fees from closings on refinances, this trapping of their borrowers also happens to be quite lucrative.

HUD Secretary Shaun Donovan acknowledges unfair pricing under HARP refinancing. (photo: Knight Foundation/flickr)

Banks that collect those payments, known as mortgage servicers, could get as much as $12 billion in revenue this year refinancing mortgages under the federal Home Affordable Refinance Program, or HARP, according to data compiled by Nomura Holdings Inc.

Borrowers who refinance mortgages through HARP, on the other hand, stand to save between $2.5 billion and $5 billion this year, according to an analysis by The Wall Street Journal of Nomura’s figures […]

That is because the new HARP rules make it easier for borrowers to refinance their loans with existing lenders. That, the critics say, allows large lenders to charge a captive customer base above-market interest rates on the refinanced loans. Borrowers refinancing through their existing lender make up about 75% of HARP refinancings, according to government figures.

“There’s essentially a monopoly on refinancing,” Housing and Urban Development Secretary Shaun Donovan said at a Senate hearing last month. For borrowers, Mr. Donovan said, “Whoever holds their current loan, whoever is the servicer, they can charge them—and we’re seeing this—very high fees.”

Donovan has gradually come around to this admission, which was evident right from the beginning. The big banks restrict their underwater borrowers, by only allowing refis above a certain loan-to-value ratio on loans they already service. As a result, they can charge more, on average about a 0.53% premium, according to Amherst Securities.

Here’s the kicker, the story relates that the Administration wanted FHFA to force the banks to open up refinancing on these loans to spur competition. These are loans owned and/or guaranteed by Fannie and Freddie, so they should be able to get this done. FHFA refused, at least according to this unnamed Administration official. Even now, FHFA claims that refis are going out at the market rate. But this is preposterous. It defies common sense that you can get a loan where your only option is one broker for the same price as a loan where there’s a competitive marketplace for the service.

It’s true that a borrower paying a 6% interest rate on a loan will welcome a 4.5% interest rate, even if 3.75% is the market rate. But the rate they’re receiving is artificial, created through a monopoly. And the cost difference is going right into the pockets of the big banks. It’s not like banks aren’t ALREADY getting major incentives to refinance through the new HARP. It costs a bank next to nothing to refinance an existing borrower, and some of those requirements were waived by the new HARP. Plus, the banks get a waiver of liability on representation and warranty claims on the underlying loans. That waiver is a massive in-kind subsidy. But banks have found a way to spin even more profit out of this.

CommunityThe Bullpen

Confirmed: HARP 2.0 Ripping Off Underwater Borrowers

The Wall Street Journal gets around to noticing that the latest version of HARP, the Home Affordable Refinance Program, has been manipulated by the leading mortgage servicers to trap their borrowers. And they add a bit of a twist. Because servicers set the fees from closings on refinances, this trapping of their borrowers also happens to be quite lucrative.

Banks that collect those payments, known as mortgage servicers, could get as much as $12 billion in revenue this year refinancing mortgages under the federal Home Affordable Refinance Program, or HARP, according to data compiled by Nomura Holdings Inc.

Borrowers who refinance mortgages through HARP, on the other hand, stand to save between $2.5 billion and $5 billion this year, according to an analysis by The Wall Street Journal of Nomura’s figures […]

That is because the new HARP rules make it easier for borrowers to refinance their loans with existing lenders. That, the critics say, allows large lenders to charge a captive customer base above-market interest rates on the refinanced loans. Borrowers refinancing through their existing lender make up about 75% of HARP refinancings, according to government figures.

“There’s essentially a monopoly on refinancing,” Housing and Urban Development Secretary Shaun Donovan said at a Senate hearing last month. For borrowers, Mr. Donovan said, “Whoever holds their current loan, whoever is the servicer, they can charge them—and we’re seeing this—very high fees.”

Donovan has gradually come around to this admission, which was evident right from the beginning. The big banks restrict their underwater borrowers, by only allowing refis above a certain loan-to-value ratio on loans they already service. As a result, they can charge more, on average about a 0.53% premium, according to Amherst Securities.

Here’s the kicker, the story relates that the Administration wanted FHFA to force the banks to open up refinancing on these loans to spur competition. These are loans owned and/or guaranteed by Fannie and Freddie, so they should be able to get this done. FHFA refused, at least according to this unnamed Administration official. Even now, FHFA claims that refis are going out at the market rate. But this is preposterous. It defies common sense that you can get a loan where your only option is one broker for the same price as a loan where there’s a competitive marketplace for the service.

It’s true that a borrower paying a 6% interest rate on a loan will welcome a 4.5% interest rate, even if 3.75% is the market rate. But the rate they’re receiving is artificial, created through a monopoly. And the cost difference is going right into the pockets of the big banks. It’s not like banks aren’t ALREADY getting major incentives to refinance through the new HARP. It costs a bank next to nothing to refinance an existing borrower, and some of those requirements were waived by the new HARP. Plus, the banks get a waiver of liability on representation and warranty claims on the underlying loans. That waiver is a massive in-kind subsidy. But banks have found a way to spin even more profit out of this.

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David Dayen

David Dayen