Big banks win in HARP 2.0 as changes lock borrowers into high-cost refis
The nation's largest banks are charging borrowers who refinance under the Home Affordable Refinance Program significantly higher rates than other types of refinance loans, according to Amherst Securities Group.
HARP 2.0, announced in November, introduced new benefits to servicers for refinancing their own loans. Different-servicer refinances received only marginal improvements, however, often requiring the new servicer to provide full representations and warrants on the new loan.
"This tends to lock a borrower into refinancing with their existing lender, which conveys tremendous pricing power to the banks," Amherst's Laurie Goodman says in an analysis of the program.
Under the program, different-servicer refinancings require servicers to gather more information about borrowers than under a same-servicer refinance.
Banks are also charging more based on loan-to-value ratios.
Amherst found that in February Freddie Mac's HARP borrowers with loan-to-value ratios from 80 to 90 paid 21 basis points more than borrowers with other types of loans. Borrowers with LTVs of 100 to 105 paid 41 bps more and those with LTVs 105 to 125 paid 53 bps more.
Results for Fannie Mae are similar. In February, HARP borrowers paid a 16 bps premium in the 80 to 90 bucket and a 42 bps premium in the 105–125 bucket.
"Fannie, Freddie and the Federal Housing Finance Administration have given the capacity-constrained originators the ability to extract excess profits from these loans, and the servicers are taking advantage of this opportunity," Goodman says.
Click on the tables, provided by Amherst, below for greater detail.
"There is only one solution — increased competition," Goodman says. "Let different servicers refinance the borrower on the same terms that are available to the current servicer."
In January, the three banks comprised 62% of Freddie’s HARP production and 36% of Freddie’s overall production. For the 15-month period from January 2011 to March 2012, they accounted for 64% of Freddie’s HARP production and 50% of Freddie’s overall origination volume.
Results were similar for Fannie Mae business — over the past 15 months, the top three originators comprised 69% of Fannie’s HARP production and 50% of Fannie’s overall production.
Goodman points out that the top three originators increased their dominance in Freddie Mac issuance more than they did in Fannie issuance.
"We believe the reason is that for Freddie Mac, the rep-and-warrant relief applies only to HARP loans, not to borrowers with LTVs less than 80," she says. "But Fannie offers rep and warrant relief regardless of LTV. Thus, there is a greater incentive for Freddie lenders to refinance HARP loans rather than loans with LTV less than 80."