Fannie Mae and Bank of America are involved in a major dispute over $7 billion of outstanding buyback requests with the GSE cutting back on the loans it purchases from the giant bank.
However, Fannie continues to purchase HARP loans from B of A. The Home Affordable Refinancing Program is designed to reach borrowers that have little or no equity in their homes.
B of A is a major servicer of Fannie loans and recent changes to the HARP program allow servicers to refinance notes with loan-to-value ratios above 125%, helping borrowers in deeply underwater states like Nevada and California.
Once a HARP 2.0 refinancing is complete, B of A can sell the loan to Fannie and the bank is relieved from any buyback risk. Fannie ends up with a less risky loan, since the borrower’s monthly payments have been substantially reduced.
Housing and Urban Development secretary Shaun Donovan told Congress recently that most servicers had their HARP 2.0 refinancing programs up and running at the end of March. “Already servicers report that they are processing applications from nearly half-a-million families who stand to save on average $2,500 per year,” the secretary said.
However, complaints about the HARP 2.0 program continue—namely that the megaservicers (because of their lock on the MSR market) are hogging all the early action.
Some members of Congress, including Sen. Barbara Boxer, D-Calif., are urging the Federal Housing Finance Agency to open the door and allow more competition. “This lack of competition gives some lenders a captive market and means borrowers are often stuck with higher rates and less favorable terms,” Boxer says in a letter to FHFA acting director Edward DeMarco.
The complaints mainly focus on buyback risk and underwriting requirements. The servicer that controls the servicing rights is relieved of any liability if the loan goes bad when they complete a HARP 2.0 refinancing. If a different lender/servicer refinances the same loan they take on the new buyback risk.
Meanwhile, underwriting requirements are streamlined for the controlling servicer, while a new lender/servicer has to comply with fuller underwriting requirements.
This “discourages competition,” the HUD secretary told a Senate panel, which “means higher prices and less favorable terms for borrowers.”
However, lenders seem to be enjoying wide margins on all originations, not just HARP loans.
A report by Keefe, Bruyette & Woods notes that the spread between the borrowers’ mortgage interest rate and the rates in the secondary market are “very wide at more than 100 basis points.” However, the KBW MBS analysts point to mortgage processing capacity as the culprit. In short, capacity constraints allow originators to continue their pricing power.
Donovan called for additional changes to HARP 2.0 to “increase participation and its effectiveness” and endorsed a HARP reform bill sponsored by Sens. Boxer and Robert Menendez, D-N.J. (Quicken Loans supports the HARP bill.)
The bill would “scale back” representation and warranty risk for new servicers under the HARP 2.0 program, Menendez said. It also reduces some upfront fees on HARP refinancings.
Freddie Mac announced it will drop a 50 basis point fee, called a “cash adjustor,” on HARP 2.0 refinancings of loans with a LTV above 125%.
Freddie also reported that it acquired $5 billion of the HARP 2.0 refis in its first-quarter securities filing. Fannie has not disclosed its purchases of HARP 2.0 loans in the first quarter.
It is unclear if Democratic leaders can push the Boxer-Menendez bill through the Senate. Even if they are successful, supporters are concerned the House will not take any action on the Senate bill.
However, Boxer is pressing DeMarco to take administrative actions that would make HARP 2.0 more competitive.
When the GSE regulator first announced the HARP 2.0 changes back in October, DeMarco noted that one of his goals was to make the special refinancing program more competitive. According to some senators and Obama administration officials—he didn’t succeed.
