New data out this week shows that refinancing has taken off, though I’m not necessarily with Matt Zeitlin in saying that this shows HARP 2.0 to be working. Previous data has shown mortgage refinance applications rising and falling specifically with the changes in the interest rate, not HARP availability. And the data on faster prepayment is a function of the economy.
But the real reason refinancing has blossomed under HARP is that banks can make a lot of money off it. The new HARP 2.0 tweaked the program so that underwater borrowers above a 125% loan-to-value ratio whose loan was purchased by Fannie Mae or Freddie Mac could participate. Typically, lenders won’t make new loans to underwater borrowers, so this requires the government to use the power of the mortgage giants to step in (an effort is underway to apply the new HARP rules to all loans, including those kept in bank portfolios, but it hasn’t passed Congress).
However, the banks changed their rules in reaction to that, basically saying that they would not accept any HARP refinances on loans other than those they already serviced. This eliminated competition for the loans, which would have brought down the interest rates. Instead, banks trapped their own underwater borrowers, who had nowhere else to turn, into accepting their interest rate for a refi, which was quite a bit higher than the prevailing rate. Homeowners still wind up, in most cases, with a lower rate and a lower payment. But banks are basically drawing tens of thousands of dollars out of each borrower, if not hundreds of thousands, with this technique. And to that a round of closing fees (while HARP 2.0 extinguishes some fees, plenty remain) and banks make out like bandits on refinancing.
So while actual mortgage purchase applications have been going sideways for two years, refi applications have surged. It’s become a huge profit center for the banks. And HARP is “working” accordingly – working to funnel underwater borrowers into overpriced refinance loans that make banks rich.
Similarly, the Fed’s announcement of QE3, designed to purchase $40 billion monthly in mortgage backed securities, is designed to push down mortgage rates and invite more purchases. But banks have not passed on that savings entirely to the borrower, generating huge spreads on every mortgage they sell.
The rich get richer.