Amherst Securities Group (ASG) analysts, in a report released today, said that servicers are charging considerably higher rates to borrowers on Home Affordable Refinance Program (HARP) loans.
They demonstrated that the profitability of these loans is further boosted because the specified pool pay-ups are much higher for higher-coupon mortgages.
This contradicts the point of the program that borrower rates should be lower under HARP. The reasons they should be less are: given that origination cost is low because documentation is less; same-servicer refinancings get rep and warrant relief on both the old loan; and the new loan and specified pool pay-ups for prepayment-protected pools are quite high so some of that benefit should be passed on to borrowers.
According to ASG analysts, not having competition has allowed servicers to charge higher rates to these borrowers at at time when the economics of origination should imply lower rates. Additionally, borrowers do not have much of a choice except to pay the higher rates since the rules favor same-servicer refinancings to a very strong extent.
In other words, ASG analysts said that high-LTV borrowers are basically stuck with same-servicer refinancings since different servicers are hesitant to take the rep and warrant risk on these loans.
Analysts explained that on same-servicer refinancings, the rep and warrant risk was mostly taken out under HARP 2.0.
In the report, they urged Freddie Mac, Fannie Mae and the Federal Housing Finance Agency (FHFA) to allow different servicers to refinance a borrower on equal conditions, with the same rep and warrant relief, as the same-servicer loans.
According to ASG analysts, this leveling of the playing field should result in a much more competitive rate for the borrower. The only losers would be the three largest banks given that their monopoly of the profits would be stopped.
HARP 2.0, which was announced in November 2011, introduced many new benefits to servicers for refinancing their own loans. By contrast, different-servicer refinancings had at best slight improvements usually requiring the new servicer to offer full reps and warrants on the new loan.
This tends to lock a borrower into refinancing with their existing lender, which conveys tremendous pricing power to the banks.
In this paper, analysts demonstrated that banks are taking full advantage of this ability by charging higher rates to HARP borrowers and, given secondary market payups for the collateral, earning massive profits on originations. Analysts also showed that in segments where competition is strong, such as pricing ,is much more advantageous for the borrower.
Analysts concluded that the solution is clear. This is to increase HARP refinancing competition by offering the same benefits on a different-servicer refinancing.