Home loan aid program enriches banks
Banks expect to reap up to $12 billion in revenue this year as a result of participating in the revised government refinancing program for 'underwater' homeowners.
This post comes from Marilyn Lewis of MSN Money.
Borrowers stand to save $2.5 billion to $5 billion from the revamped federal home loan refinance program. That's great news for troubled homeowners. The Home Affordable Refinance Program, dubbed HARP 2.0, finally is kicking into high gear, reaching more and more borrowers.
But the big kids under the federal Christmas tree aren't American homeowners. They're banks. Two of the biggest, in particular: JPMorgan Chase, the biggest U.S. bank, and Wells Fargo, which is the fourth largest.
Critics blame the structure of HARP's rules for enriching banks at consumers' expense and banks for taking advantage of the situation. All together, mortgage servicers -- the bank arms that bill homeowners and collect mortgage payments -- could pull in as much as $12 billion in revenue this year alone as a result of participating in the program. (Post continues below.)
HARP is supposed to help underwater homeowners who are current on their mortgage payments get refinanced into current ultralow interest rates in order to lower their payments to more affordable levels. They haven't a prayer of qualifying otherwise because of their negative equity. HARP pays banks incentives to refinance qualified borrowers.
But borrowers are finding it difficult to get HARP loans at banks other than the ones that already service their mortgages. It's harder to qualify at competing banks. The lack of competition lets banks impose higher fees and interest rates for HARP refinances, critics say.
Some banks limit HARP refis to their current mortgage customers. The San Francisco Chronicle writes:
One obstacle for borrowers is that most big banks, including Bank of America and Chase, won't refinance a loan under HARP 2 unless they already service it.
"We're focused on our own customers and continue to experience strong demand," BofA spokesman Terry Francisco says. BofA has taken 60,000 applications for HARP loans since January and has funded more than 30,000.U.S. Sen. Barbara Boxer singled out the Federal Housing Finance Agency, which runs the HARP program. In a May 23 letter to Edward DeMarco, the FHFA acting director, she says banks that want to compete for customers' refinances face stricter rules and more hurdles. This puts borrowers at the mercy of their current mortgage banks.
Boxer challenged FHFA to level the playing field. A press release on her website says:
"This lack of competition gives some lenders a captive market and means borrowers are often stuck with higher rates and less favorable terms," Senator Boxer wrote in the letter. "Current policy is rewarding banks with excess profits at the expense of struggling homeowners."
Boon to banks
The Wall Street Journal writes that most HARP borrowers are paying 5% to 6% on their new refinances. The Journal cites analysis by Nomura Holdings, a financial services and bank holding company.
But interest rates on the open market are at historic lows. For example, the average interest rate on a 30-year, fixed-rate mortgage this week is 3.66% (with an average 0.7 point), according to Freddie Mac's weekly survey.
The Journal quotes HUD Secretary Shaun Donovan fuming at a Senate hearing, "Whoever holds their current loan, whoever is the servicer, they can charge them -- and we're seeing this -- very high fees."
The Journal cites evidence of the problem:
- About three-quarters of HARP borrowers stay with their old lenders.
- HARP borrowers pay, on average, 0.1 to 0.53 percentage points more to refinance than non-HARP borrowers.
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, Bank of America Corp. and Citigroup Inc. rounded out the top five, which together hold 58% of the market.
The banks defend their rates as competitive. FHFA officials counter that the problem is not HARP but a lack of competition among a shrinking pool of lenders. The mortgage bust, now in its sixth year, has seen many lenders consolidate, close or retreat from mortgages.
HARP, introduced in early 2009, was meant to help homeowners with underwater mortgages refinance into market rates without mortgage insurance.
At first it was little used. Few homeowners could qualify. But the government has progressively loosened the requirements and the program has taken off. HARP 2.0 refinancing "skyrocketed" in the first quarter this year, based on the most recent data, says American Banker magazine.
In March alone, servicers completed 80,000 refinancings of Fannie/Freddie loans under the expanded Home Affordable Refinancing Program. The key to the program's success: totally removing the LTV cap, allowing for loans with LTVs north of 125% to refinance.Mortgage applications -- including HARP loans -- are at the highest levels since 2009.
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How we ACTUALLY deal with this crisis: Validate it first. The 2 key attributes of bad credit are- the unstable borrower and the irresponsible lender. Jobs are tough, so low-money-down purchases on credit are instantly volatile. That said, trash the software diligence and let's get some genuine eyes building these files. Fixing the falling values is paramount. We cannot do that by lowering rates and offering get out of your burden tickets.
A 5-5-5 program would do it. We know that we cannot rely on values and jobs are precarious. Add up the borrowed debt and amass it (one debt- regardless). Ascertain true income based on no less than three years' proof (IRS certified). Use the Debt-to-Income ratio of 35%. Why? Because out of 100% of gross income, 30% goes to taxes, 35% would go toward debts owed here and 35% more would cover the cash existence of the borrower until they are out of debt. A new loan occurs using all of the borrower's assets as collateral and a pledge to pay regardless of circumstance. The new loan would be at 5% for 5 years and paydown at least 5% of what is totally owed. At the end of each 5 year term, the borrower would be required to refinance another chunk of debt using this formula and terms. The non-performing debt becomes a second lien on all the assets. There is no interest accrual on it but there is no settlement on the outstanding balance either. It exists until settled.
IF we did this... every institution who touched this debt from origination through default would pay to service these 5-5-5 remedies. Every employer of every borrower involved in the program would be required to cooperate with consistency until it is settled. A new credit sector would create and make these loans and service them. The objective would be to sever credit from banks, build a regulated stable platform for future credit and ensure it is capable of performing without bailing. Every loan in the portfolio that involves real property revisits every aspect of diligence, fixing everything that has a validation aspect-- condition, zoning, survey, etc.
Ideally, since the loan-to-value formula is not used, borrowers chunk down debt in 5 year intervals typically settlng completely in less than 20 years. Every real property in America gets validated. A pox on bad banks pays for the remedy and bars them from future folly. Employers hire because- it no longer works to have one person do the jobs of 10 while you are on the golf course making 500 times the personnel. We can destroy that fantasy- in process. Boards sign as responsible parties (guarantors). There would be no value in derivatives because all the funs needed to create these remedies already exists. Banks would become Commercial Institutions only and be fully regulated for such transactions, including the funding of new businesses as a component of their overall rating.
The nation was compromised by banks but needs credit to recover. This works. Let's get going on it immediately. Contact your Congressional members (especially the Party of NO) and demand that they cooperate as soon as today.
Actually, the WSJ article states that people seeking a HARP loan are currently paying on mortgages that are in the 5-6% range, not that the rates they are getting are in the 5-6% range.
From the article:
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."
HARP rates are not as low as typical rates you see posted but they can save people a lot of money. To find a HARP lender in your area, just search for " "your city" HARP lenders" in Google.
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