HARP Loans Make Big Bucks for Banks

By Karen Rogers - June 22, 2012 | Tickers: BAC, JPM, WFC | 0 Comments

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You’ve got to admire the way Jamie Dimon and friends always find ways to make extra money off of government programs.

The Home Affordable Refinance Program, or HARP, originated in 2009 and was designed to help underwater homeowners refinance their home loan at a lower interest rate.  To make the process easier, the government removed the loan-to-value cap that had kept otherwise qualified homeowners from refinancing. So far at least 1.1 million homeowners have refinanced through HARP and the number of applicants keeps rising.

But the program is voluntary and to encourage banks to participate, the government eased the appraisal requirements and allowed the banks to add additional loan criteria of their own.  Very importantly, the government also eliminated some of the liability banks would face when they resold these HARP loans. 

The field is currently dominated by the big three banks: JP Morgan Chase (NYSE: JPM), Bank of America (NYSE: BAC) and Wells Fargo (NYSE: WFC), and together they account for over 60% of all HARP refi applications. The cost to refinance an existing client through HARP is minimal, and both JP Morgan Chase and Bank of America have limited refinancing to their own clients. Wells Fargo, while accepting HARP applications from non-Wells Fargo clients, has put a cap on the amount the existing loan can be underwater as one of their criteria.  The inability of homeowners to obtain HARP loans from different lenders has caught the government’s attention.   During last month’s Senate hearing, Shaun Donovan, the Housing and Urban Development Secretary, commented: “There’s essentially a monopoly on refinancing,” and went on to state, “Whoever holds their (the borrowers) current loan, whoever is the servicer, they can charge them—and we’re seeing this—very high fees.” 

Not happy with the profits HARP loans were generating, the banks tacked on an additional .05%, allowing them to collect over $12 billion in additional revenue. During an April 13^th conference call, Wells Fargo Chief Financial Officer Timothy Sloan told analysts that 15% of new mortgages made during the first quarter were HARP refinancings.  That same day, J.P. Morgan CEO Jamie Dimon told analysts that profit margins "were several hundred million (dollars) higher than what we would call normal for a whole bunch of different reasons, including HARP.”  To help increase profits, the banks often only marginally lower the interest rate but keep the refinancing costs and fees high.  In a practice harkening back to the pre-2007 mortgage industry meltdown, banks are also securitizing and reselling these mortgages.

The problem isn’t that banks are making money off these loans.  They are, after all, for-profit institutions.  But tacking on an extra .05% just because they can?  To minimally lower interest rates but keep loan costs high?  To repackage and resell mortgages for the high fees they generate?

HARP was designed to help struggling homeowners refinance and keep their homes and not to be turned into another cash cow for the banks.  Someone needs to remind Jamie that the homeowner is supposed to be the primary beneficiary, not JP Morgan Chase.

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