Last year, the government tweaked the Home Affordable Refinance Program (HARP) program in order to spur refinancing of underwater mortgages. By removing loan-to-value cap, the government allowed homeowners current on their mortgage payments the opportunity to refinance at lower rates even if their existing mortgage was bigger than the current value of the home.
"These changes have been met with a very positive response from homeowners, particularly in deeply underwater states where so many families have been locked out of the refinance market for years," HUD Secretary Shaun Donovan testified before the Senate Banking Committee last month. "Already, servicers report that they are processing applications from nearly a half-million families who stand to save on average $2,500 per year...speeding our efforts to help responsible families stay in their homes and start to rebuild the wealth they lost in the economic crisis."
According to The WSJ, homeowners stand to save between $2.5 billion and $5 billion this year because of HARP refinancings.
But the Journal also reports that the administration is upset with the banks, who are reportedly charging an average of 0.5% more than market rates for the HAMP refinancings. The banks, led by Wells Fargo (WFC), JPMorgan (JPM), U.S. Bancorp (USB), Citigroup (C) and Bank of America (BAC) stand to generate up to $12 billion for refinancings under the HARP program this year.
At issue is that most people under water on a mortgage can't get refinancing from anyone other than their original lender, leading Secretary Donovan to warn about a "monopoly on refinancing" during the same Senate testimony.
Anyone who's tuned into The Daily Ticker (nee Tech Ticker) over the years knows that nothing gets Henry and I riled up like bailouts for the banks and the government treating them with kid gloves. But any "outrage" over banks profiting from HAMP refinancings seems like a 'tempest in a teapot', to quote Jamie Dimon.
I'm no fan of the industry but it sounds like the government is asking banks to refinance mortgages with no restrictions on loan-to-value and is acting surprised that banks are charging above-market rates for those loans — which the homeowners couldn't otherwise get. There's a reason why other lenders won't help the struggling homeowners -- it's not an economically prudent loan to make.
"The programs being advanced by the administration are intent on getting people to do stuff that are of questionable benefit," says one industry expert, who spoke on background. " The bottom line is nobody wants to offer the types of modifications [HUD] wants to be offered."
So if the government wants lenders to refinance - typically at lower rates than the loans were originally written - there has to be a financial incentive for the bank to do it.
Let me know if I'm missing something here but banks are for-profit institutions and to pretend otherwise is naive, at best. If the government really wanted the banks to be an arm of policymaking, Washington should have nationalized them in 2008, or at least put a lot more restrictions on the TARP funds, as Henry and I discuss in the accompanying video. (And, yes, the Obama Administration came in after TARP but could've taken a much harder line -- with actions and not just words -- after coming into office in 2009.)