Changes made late last year to the Obama administration's flagship mortgage refinance program, Home Affordable Refinance Program (HARP), have boosted profits at the nation's largest banks at the expense of homeowners and U.S. taxpayers, according to mortgage experts testifying at a Senate hearing the week of April 23.

"Borrowers are paying high fees because the banks are making oligopoly profits," Laurie Goodman, a senior managing director at Amherst Securities Group, said in written testimony. "These costs can be lowered by promoting competition."

At issue is some of the fine print in changes announced last October to the HARP, a program intended to make it easier for homeowners with Fannie Mae and Freddie Mac mortgages to refinance at lower interest rates. The 'new and improved' refinancing program - known as HARP 2.0 - is intended to help homeowners who are current on their mortgages but have seen the value of their homes drop. The revisions expanded access to the program, opening the door to borrowers who owe more than 25% more than their homes are worth. But critics of the revised terms argued at a Senate housing subcommittee hearing mid-week that HARP 2.0 now provides a big leg up to the homeowner's existing servicer by removing the risk that it will have to repurchase from Fannie and Fannie certain mortgages that become delinquent, while requiring any potential competitor to bear that same risk. A new servicer is further at a disadvantage because it is required to collect more information than the existing servicer must about the borrower. "Effectively, borrowers run into obstacles and greater costs in obtaining a mortgage from any lender besides their current servicer," Christopher Mayer, a professor at Columbia Business School, said in written testimony.

Democratic Sen. Robert Menendez, chairman of the subcommittee, convened the hearing in an effort to build support for legislation that he is writing with fellow Democratic Sen. Barbara Boxer. The Menendez-Boxer bill, which has yet to be introduced, would remove the restrictions that favor existing servicers, among other changes that are designed to expand eligibility for HARP.

"We need to inject competition and market forces into this market where servicers have an unfair monopoly on refinancing certain borrowers, who effectively have no choice but to use their original lender," Menendez said.

"The important thing to keep in mind here is that for these Fannie and Freddie loans, taxpayers already own the risk if these homeowners default regardless of whether we allow the homeowner to refinance or not. So stopping homeowners from refinancing into lower-cost loans where they are less likely to default harms both homeowners and taxpayers and is crazy as a policy."

For that reason, Mayer argued that U.S. taxpayers would also gain from a move to lift the program's restrictions for new servicers. More homeowners would qualify for a refinancing, which would benefit taxpayers who are responsible for the losses incurred by Fannie and Freddie.

Mayer acknowledged that the two housing giants are also major investors in mortgage bonds, and more refinancing of those bonds will lead to smaller yields for Fannie, Freddie, and other investors. But he said those losses can be recovered with slightly higher fees on homeowners seeking a refinance, who would still come out as winners in the end.

In addition to mortgage bond investors, other losers under the Menendez-Boxer proposal could include Bank of America, Wells Fargo, and JPMorgan Chase, which are the nation's top three mortgage servicers. Goodman's research has shown that profit margins on same-servicer refinancing are 3.5%-6.6%. "The benefits of this accrue disproportionately to the top 3 servicers, who service well over 50% of the eligible loans," Goodman said. But other servicers might benefit from changes to HARP that would make it easier for new competitors to compete with the servicer of the existing loan.

When Menendez asked Debra Still, chair-elect of the Mortgage Bankers Association (MBA), about this idea on Wednesday, she said that her group "would agree that all lenders should have the same level playing field." While the MBA stopped short of endorsing the Menendez-Boxer proposal, Still stated in her written testimony that the trade group is "particularly intrigued" by provisions to remove existing HARP restrictions based on who currently services the loan. "Such features only serve to increase borrower and lender confusion, and reduce the number of qualified borrowers who could benefit from the program," she stated. The Menendez-Boxer legislation takes a narrower approach than a refinancing bill that President Obama proposed in his State of the Union address, since it would only apply to homeowners who already have mortgages backed by Fannie and Freddie.

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