Quite an interesting piece via the WSJ on the HARP program. This program originally had little demand (900K mortgages) because it was limited to LTV (Loan to Value) of 125% or less. But once that limitation was removed [Oct 24, 2011: Obama to Change HARP to Refinance ALL Government Backed Mortgages, Not Just Those who Owe 125% or Less] and just about anyone with a pulse could refinance the floodgates have opened. While it is helping homeowners to the tune of a few million, the banks who service these loans are making out like bandits. For those newer to the website, understand with the financial crisis and all the consolidation in the sector, a handful of big boys now control the mortgage market [Sep 18, 2009: Three Oligarchs Now Dominate Mortgage Market]
More than half of U.S. residential mortgages are being made by just three large banks. It is a stunning change, but is it good for the housing market, and to what extent will it boost profits over the long term for this elite trio: Wells Fargo, Bank of America and J.P. Morgan Chase? The three originated 52% of mortgages in the first half, according to Inside Mortgage Finance, just over double these banks' market share in 2005. In servicing, their share is 49%, compared with 22% in 2005.
So what happens when there is a lack of competition? Prices go up. And in this program there is a huge advantage given to those who refinance with their original originator. And what do you think those originators are doing with fees? You guessed it.
- A government program that helps struggling homeowners take advantage of low interest rates to cut monthly mortgage payments is providing an unexpected revenue boost to large banks such as Wells Fargo& Co. and J.P. Morgan Chase& Co.
- 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.
- The contrast is the latest illustration of the competing demands policy makers must juggle when they devise responses to the housing bust, now in its sixth year. Federal officials last year revised the HARP program in a bid to encourage banks to refinance borrowers who were current on their payments but owed more than their properties were worth. The revisions have driven a sharp increase in refinancings, following years in which the program fell short of government projections.
- But some critics, including members of the Obama administration, say the changes risk making HARP a giveaway to big banks. (a risk? hah) 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."
- The Obama administration and some mortgage-industry participants say this arrangement leaves the lion's share of refinancing activity with giant banks. Among the biggest beneficiaries: Wells Fargo,held a third of the market as of March, and J.P. Morgan, with more than 10%.
- Banks have been charging HARP borrowers as much as 0.53 percentage point more than the market rate on the refinanced mortgages, according to Amherst Securities.
Not the first and not the last giveaway to our To Big to Fail Banks [Nov 13, 2008: Washington Post - A Quiet Windfall for US Banks]
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