Megabanks Raking in the Dough on HARP 2.0?

For the past three months, the nation's largest residential servicers have had a lock on refinancing high LTV and underwater loans in their GSE portfolios. In a nutshell the megabanks could manually underwrite loans they controlled under Dec. 1 revisions made to the Home Affordable Refinancing Program.

Other lenders had to wait on the sidelines for Fannie Mae and Freddie Mac to update their automated underwriting systems to process HARP 2.0 refinancings.

And while they waited, Wells Fargo, JPMorgan Chase and Bank of America took full advantage of their captured audience. A new report by Amherst Securities Group shows that 62% of Fannie and Freddie HARP production in March came from just these three servicers—and the lack of outside competition gave them the pricing power to charge higher rates.

The banks are "taking advantage of this ability by charging higher rates on HARP borrowers and, given secondary payups for the collateral, earning massive profits on originations," the ASG analysts write.

But this advantage should dissipate now that the GSEs have updated their AU systems and other lenders can beat the bushes for underwater borrowers with Fannie/Freddie guaranteed loans.

Mortgage Bankers Association chief economist Jay Brinkmann suggested last week that hungry HARP lenders might do well looking for borrowers in the “sand” states and other areas where home prices have plummeted.

"We saw big state-level differences in refinance applications for February over January. Florida was up 49%, Arizona was up 61% and Nevada was up," the MBA executive said. "HARP clearly is a driving force in those states that saw the most defaults and the biggest drops in home equity," he added.

In many other places, like Texas, refinancings were flat, Brinkman said. Colorado was down 3%, Connecticut was up only 2% and Virginia was up 1%.

Borrowers must be current to qualify for a HARP 2.0 refinancing although there is some flexibility if the borrower has one late payment. Loans going through Fannie's Delegated Underwriting machine will be kicked out if the borrower had a 60-day late payment in the past 12 months.

Otherwise, there is no minimum credit score and no loan-to-value cap on HARP 2.0 loans going through DU and Freddie's AU system known as Loan Prospector.

However, it is expected that lenders using these AU systems will impose overlays, such as a minimum credit scores, since they are taking on representation and warranty risk for the new loans.

The servicers using manual underwriting don't face such buyback risk on newly originated HARP 2.0 loans. "There are advantages for the same servicer to continue to use manual underwriting," one GSE executive said.

Cole Taylor Mortgage president Willie Newman told NMN that he isn't deterred by taking on rep-and-warranty risk on a refinanced HARP 2.0 loan.

His mortgage banking shop in Ann Arbor, Mich., has been preparing to participate in HARP 2.0 for several months. "We were just waiting" for the agencies to issue the guidelines for their AU systems, Newman said. He sent the specifications last Monday to his retail branch managers and the lender's nationwide network of 400 mortgage brokers.

The HARP 1.0 program was rolled out in May 2009 to facilitate the refinancing of Fannie/Freddie guaranteed loans originated pre-June 2009 with loan-to-value ratios greater than 80% and up to 125%.

By yearend 2011, roughly 931,200 loans in the 80% to 105% LTV bucket had been refinanced under the first HARP program. But only 90,600 underwater borrowers with LTVs of 105% to 125% have benefited.

HARP 2.0 eliminates the 125% LTV cap entirely, and it makes other enhancements to encourage more refinancings of high LTV loans.

Newman noted that Cole Taylor Mortgage has experienced strong loan performance on the HARP 1.0 product his shop has originated and is comfortable with the buyback protection provided under HARP 2.0. CTM is a subsidiary of Cole Taylor Bank, Chicago.