NEW SCHEME: Are Banks Now Skimming Off Home Refinancing Customers?

Regulatory efforts to help home-owners with under-water mortgages get refinancing have certainly benefited borrowers, but the larger banks which created this mess are even bigger beneficiaries of these arrangements. The new federal program is known as the Home Affordable Refinance Program (HARP), and according to data analyzed by Nomura Holdings Inc., banks could benefit by over $12 billion from revenues under the program.

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Borrowers benefit from HARP by getting lower rate refinancing, thus cutting their monthly mortgage payments. However, the aggregate savings under HARP for these borrowers could be only $2.5 billion to $5 billion, as computed from Nomura’s figures.

The difference in benefits is coming under criticism, and as usual the larger banks are being asked for explanations. Though responses from the larger banks have ranged from “competitive,” “market-driven pricing” and “unexpectedly high demand for refinancing,” the real reason could be elsewhere.

After the housing debacle, the housing mortgage industry has become increasingly concentrated in the hands of a few of the larger banks – Wells Fargo (NYSE:WFC) has a third of the market, while JPMorgan (NYSE:JPM) has more than 10 percent. Another ~25 percent of the market is held by U.S. Bancorp (NYSE:USB), Bank of America (NYSE:BAC) and Citigroup (NYSE:C). As a result more than 58 percent of the market is held by just five banks. Oligopoly, anyone?

Also, the HARP rules are geared to make it easier for borrowers to refinance with existing lenders. The combination of these two factors have, according to critics, enabled banks to take advantage of the now captive refinancing customer by charging rates that are higher than market.

At a Senate hearing last month featuring Housing and Urban Development Secretary Shaun Donovan, Donovan said: “There’s essentially a monopoly on refinancing.” For borrowers, Mr. Donovan said, “Whoever holds their current loan, whoever is the servicer, they can charge them—and we’re seeing this—very high fees.”

Given that about 75 percent of HARP refinancing is through existing lenders, Mr. Donovan may be right. According to Amherst Securities, hapless HARP borrowers end up paying almost 0.53 percent higher rates than market.

What’s the government’s view on this?

The regulating agency for HARP is the Federal Housing Finance Agency (FHFA). Officials at FHFA acknowledge and explain away the lack of competition as due to the failure of many non-banking lending agencies and the withdrawal from the market of other large banks. Explaining that the problems are not due to HARP, “We feel very comfortable that lenders are offering borrowers the HARP product at the going market rate,” said Meg Burns, the FHFA’s senior associate director for housing policy.

Here we go again.

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