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. (WFC) and J.P. Morgan Chase & Co. (JPM).
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.
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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.
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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, which held a third of the market as of March, and J.P. Morgan, with more than 10%, according to Inside Mortgage Finance. U.S. Bancorp (USB), Bank of America Corp. (BAC) and Citigroup Inc. (C) rounded out the top five, which together hold 58% of the market.
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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. Officials at the Federal Housing Finance Agency, the independent regulator that runs the program, said the premium is far smaller, around 0.1 percentage point on average, for Fannie Mae borrowers.
A Wells Fargo spokeswoman said the bank's rates are "competitive with our traditional refinancing loan options." A J.P. Morgan spokeswoman declined to comment on the rates it is charging borrowers but said "demand from customers has exceeded our expectations." A Bank of America spokeswoman said, "We offer market-driven pricing for both HARP and traditional refinances." A spokesman for Citi said the bank is offering market rates. A U.S. Bancorp spokesman couldn't be reached for comment.
The administration is pressing lawmakers to make it easier for consumers to refinance with different lenders. A senior administration official said the administration tried to get the FHFA to change the policy last year but was unable to do so.
The FHFA, which oversees Fannie Mae and Freddie Mac, which finance the lion's share of home mortgages, defends the program's structure. Officials there say that any lack of competition is a problem felt in the overall mortgage market, which has shrunk for years with the collapse of many nonbank lenders and the retreat of large banks such as Bank of America, and not a result of HARP.
"We feel very comfortable that lenders are offering borrowers the HARP product at the going market rate," said Meg Burns, the FHFA's senior associate director for housing policy.
Wells Fargo Chief Financial Officer Timothy Sloan told analysts in an April 13 conference call that HARP refinancings made up 15% of new mortgages during the first quarter. At J.P. Morgan, Chief Executive James Dimon told analysts on a conference call April 13 that profit margins "were several hundred million [dollars] higher than what we would call normal for a whole bunch of different reasons, including HARP" and mortgage-industry dynamics such as supply and demand.
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Banks also can reap gains as the mortgages are securitized and sold, because of reduced risk that borrowers will repay their mortgages early. Margins on the sale of securitized mortgages averaged 2.1 percentage points higher in the first quarter this year than last year among the top five servicers, an analysis of data from investment bank Keefe, Bruyette & Woods shows.
The original HARP, rolled out in 2009, blocked borrowers from refinancing if they owed more than 125% of their home's value. Fewer than 900,000 borrowers had used the program when President Barack Obama announced changes last fall. The revamped program removed that loan-to-value cap and made other tweaks.
Mortgage rates have hit the lowest levels on record, sinking to an average of 3.71% for a 30-year fixed rate loan last week, according to Freddie Mac.
Nomura analyst Glenn Schorr said in a research note that most borrowers seeking HARP loans are paying interest rates of 5%-6%. Those borrowers, he said, "would certainly prefer a 3.75% mortgage, but they will happily take a 4%, 4.25% or even a 4.5% loan as well."
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