Leaders of a Senate banking subcommittee renewed a push to keep expanding the Home Affordable Refinancing Program, but they raised concerns over big-bank domination of HARP.
Concerns arose over how recent changes to HARP pushed more refinancing business to the largest banks, allowing them to charge higher fees to borrowers.
When the Federal Housing Finance Agency expanded the program last fall to allow more underwater borrowers to refinance into a lower rate, it allowed the current servicer on the loan to avoid new representation and warranty risk as long as the borrower hadn't missed a payment in six months and employment was verified.
If a borrower went to a new servicer, by contrast, more due diligence work would need to be done and the rep and warrant risk would still transfer.
This allows the original bank, which is usually one of the big four to charge the borrower a higher rate than they normally would have but still lower than the original loan, collect the servicing fee and generate a profit margin, said Laurie Goodman, senior analyst for Amherst Securities, while speaking to the Senate panel.
She said the larger lender profit margin can reach up to seven or eight points on the refinance — or $15,000 on a $200,000 loan — versus an average of one to two points, or $2,000 on the same refinance. Goodman raised the concerns in a March research report.
"We have long argued that the single most effective change that can be made to the HARP program is to encourage competition by allowing different servicers to refinance a borrower on the same terms as the current servicer is able to do," Goodman said. "We believe this would create many more refinances for the targeted HARP-eligible population, and those refinances would be done at a considerably better rate to the borrower."
She backs a bill from Sens. Robert Menendez, D-N.J., and Sen. Barbara Boxer, D-Calif. Their proposal would relieve rep and warrant risk for all servicers and allow borrowers with more equity in their home to refinance as well.
HARP demand is rising at the banks, and they are generating new profits from it. Revenue at the Wells Fargo (WFC) mortgage department jumped by $1.6 billion in the first quarter as originations spiked. The bank said 15% of the originations completed in the first three months of the year were refinances under the new HARP.
Anthony Sanders, a professor of finance at George Mason University, told the panel Bank of America (BAC) received more than 30,000 HARP applications since mid-January.
But he warned against any further relief programs beyond the attorneys general settlement and principal write-down proposals, until more studies could be done on their effect, not individually, but collectively on the housing market.
"At some point the collective impact could drive our banks into bankruptcy," Sanders said. "Let us be wary of another policy change that has unintended consequences. Any further changes should be enacted with extreme caution."
Even Debra Still, chairman of the Mortgage Bankers Association, said she would support more competition in the program.
"We can get to our borrowers sooner if more lenders are allowed to help," Still said at the hearing.
Christopher Mayer, professor of finance and economics at Columbia Business School, said there should be tweaks done to the specific HARP expansion to provide the best results for the entire market, not just the largest players.
"It leaves most of the share with the largest servicers and will not be as beneficial to homeowners and taxpayers if we leave the current HARP 2 structure in place," Mayer said.