Following the collapse of the housing market in 2008-9, many homeowners who owed more on their mortgage than their property was worth were either ineligible for the federal government’s Home Affordable Refinance Program, or were made to jump through hoops by banks who wanted to discourage people from refinancing into lower-interest loans. But recent rule changes have turned HARP into a favorite of the big mortgage servicers.
Banks are suddenly loving HARP refinances for two reasons, reports the Wall Street Journal.
The primary reason is that recent rule changes make it easier for homeowners to refinance with their current lender.
Approximately 75% of HARP participants simply go to their existing lender for the lower-interest loans. But the banks are using this as an opportunity to put these customers into mid-interest loans that are significantly higher than the rock-bottom interest rates being given to new borrowers.
And the five largest mortgage servicers are responsible for about 58% of the mortgage refinance market.
“There’s essentially a monopoly on refinancing,” Housing and Urban Development Secretary Shaun Donovan recently told lawmakers. “Whoever holds their current loan, whoever is the servicer, they can charge them — and we’re seeing this — very high fees.”
Some estimates show that HARP borrowers are refinancing into loans up to half a percentage point higher than the market rate for refinances.
Wells Fargo, which holds around one-third of the refinance market, tells the Journal its rates are “competitive with our traditional refinancing loan options.”
The other reasons banks are now HARP’s best friend is that the refinanced loans represent a reduced risk when they are securitized and sold. This is because the HARP homeowners are less likely to default than they were before, while at the same time there is very little risk that these homeowners will attempt to pay off their loan early.
In all, reports the Journal, lenders could see upwards of $12 billion in revenue this year tied to HARP refinances, while HARP borrowers are expected to save somewhere between $2.5-5 billion this year.
Homeowner Aid Boosts Big Banks [WSJ.com]