By David Schawel: The Economics Behind the HARP Program
HARP, The Home Affordable Refinance Program, is a streamline refinance program developed to help borrowers who have continued to make their mortgage payments, but have be unable to refinance due to a decline in their home value. Underwater borrowers have been stuck in a “no-win” situation of sorts, being stuck in a well above market mortgage rate (over 6% in many cases) despite being current on their existing loan and maintaining strong credit. Various fees and a LTV ceiling cause the original HARP program to flame out unsuccessfully. Blame was quick to be cast among the major lenders, the GSE’s, as well as the Government.
The early results of HARP 2.0 are in, and the program’s modifications appear to be spurring strong activity. Are the big bad “too big to fail” banks finally relenting and playing ball? As an investor in the securitized mortgage market, I see aspects of the market that the average borrower or market participant does not. In this post I will walk through the economics of mortgage origination for HARP loans, break down exactly how much these banks are making, and how they are able to do so.