Shah Gilani: Finally, some well-deserved help for beleaguered monster banks is on its way. Make that, well on its way. Those poor big banks accidentally and inadvertently got caught up making so many easy loans to deserving, hard-up borrowers, who wanted to buy overpriced dream homes, and a few million other folks who deserved two homes and McMansions to keep up with the Joneses (you know the Joneses… most of them were “friends of Angelo”).
But now, at last, the banks are making profits again.
After suffering the indignity of insolvency and near collapse for all their hard work, the New Samaritans are still being haunted by their generosity, as regulators hound them into settlement submission, merely for doing God’s work.
So, what’s the good news?
The second quarter may be a good one for the three biggest service banks, namely Wells Fargo (NYSE:WFC), Bank of America (NYSE:BAC), and – the little bank that could, run by that kid named Jamie – JPMorgan Chase (NYSE:JPM).
What’s strange is that these do-gooders are being helped by some of the same government folks who are still attacking them in public venues where voters hang their hats.
What’s not strange is that tons of underwater homebuyers, who are drowning in debt on dwellings whose prices have fallen 30% to 40%, aren’t blaming banks and are running to their rescue.
Okay, maybe they’re not running, maybe it’s more that they’re being corralled, like sheep. But either way, they are helping banks fatten their profits pools (make that bonus pools) again.
They’re repaying the banks’ favor of giving them loans in the first place by coming (more like being forced) back to the banks to get refinanced on better terms.
But they’re not doing it on their own. The banks have a partner helping to round up their old customers and corral them into the breeding profits barn.
That Partner is HARP 2.0
The original Home Affordable Refinance Program, which was launched in April 2009, failed miserably (because there was nothing in it for banks). But the powers that be (the banks… DUH) harped for a new HARP, and they got it last November.
The new program is known as HARP 2.0 (that’s because it’s twice as profitable for the big banks that sunk the economy and the world under Housing Bubblemania 1.0).
Okay, enough sarcasm; let me slice and dice this succinctly for you.
Under HARP 2.0, if a borrower’s mortgage is guaranteed by Fannie Mae or Freddie Mac, they’re in like Flynn.
Of course, the loan had to be sold to Fannie or Freddie on or before May 31, 2009. Borrowers can’t have missed any payments in the past six months and can’t have missed more than one in the past 12 months. And their LTV (loan to value) has to be 80% or higher. (Sorry, no help for the deserving, saving, and paying crowd – you’re on your own because you are stupid and don’t get the “leverage” thing or the “too-big-to-fail” thing.)
Now, an underwater borrower can refinance their old mortgage no matter how high their loan-to-value (LTV) may be. Under the old HARP, the limit was 125%.
The idea is simple. If underwater homeowners can refinance and pay less (or get shorter loans to pay down their debt faster) then they’re less likely to default, with all those ugly ramifications for everyone… especially the banks.
So, why’s this a great deal for the big banks?
There’s virtually no competition for them. Because under HARP 2.0, if a bank that sold a mortgage to F&F (the Fannie & Freddie Factory) refinances it (no mater what the LTV is now), they are not subject to the same old “putback” provisions they are dealing with now. The representations and warranties they used to have to make – which said they did their homework on these loans and if they default or there are other problems they will buy them back – have been waived this time around.
That means no other bank (not granted a waiver) is going to make a HARP loan, because they will be threatened indefinitely by potential putbacks.
Ain’t going to happen.
Given the lack of competition, banks are, believe it or not, charging higher rates and fees than they otherwise would be able to in a “free” market. But, whatever.
The banks have other luxuries. For instance, F&F are paying them a premium to buy the newly minted loans in bulk. They don’t need a new appraisal. And since they already have lent to the borrower (meaning they have “files” on them), they have less paperwork and lower costs.
And, wouldn’t you know it, they have more profit potential because their captive “sheep” can be steered into buying title insurance and flood insurance, and any other insurance they need, from – guess who? That would be subsidiaries of the banks.
Talk about vertical integration. The banking business has become sexier than being horizontal!
The bottom line… the banks win, again.
Sometimes, a lot of the time, there’s someone smarter than me who says something so much better than I could ever quip. In this case, it’s Laurie Goodman, a senior managing director at Amherst Securities. Laurie is quoted in today’s American Banker saying this on the subject: “It’s clearly a gift to the largest banks.” She calls the profits banks are making on Harp refinances “huge.”
There you have it.
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Shah Gilani is the editor of the highly successful trading research service, The Capital Wave Forecast, and a contributing editor to both Money Morning and The Money Map Report. He is considered one of the world’s foremost experts on the credit crisis. His published open letters to the White House, Congress and U.S. Treasury secretaries have outlined detailed alternative policy options that have been lauded by academics and legislators.
His experience and knowledge uniquely qualify him as an expert. Gilani ran his first hedge fund in 1982 from his seat on the floor of the Chicago Board of Options Exchange. When the OEX (options on the Standard & Poor’s 100) began trading on March 11, 1983, Gilani was working in the pit as a market maker, and along with other traders popularized what later became known as the VIX (volatility index). He left Chicago to run the futures and options division of the British banking giant Lloyds TSB. Gilani went on to originate and run a packaged fixed-income trading desk for Roosevelt & Cross Inc., an old line New York boutique bond firm, and established that company’s listed and OTC trading desks. Gilani started another hedge fund in 1999, which he ran until 2003, when he retired to develop land holdings with partners.