Guest Post: TBTF Banks Laughing All The Way Home Thanks To HARP

Tyler Durden's picture

Submitted by David Schawel of Economic Musings blog,


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.

Mechanics of Securitization

Many realize that mortgages are sold into Fannie/Freddie pools but few know the intricacies.  If a borrower has a rate of 4% on a 30yr mortgage, the investor of the pool only receives 3.5%.  The remaining 0.5% (50bps) is split between the servicing fee and GSE “guarantee fee”.  Similar 4% loans will then be aggregated together into a pool.  A “30year 3.5” is a pool of 30yr 4% mortgages with a coupon of 3.5%.  As of today’s close, a 30yr 3.5% pool trades at a price of ~$105.75.  If you tack on the 1% origination fee that most charge, and the servicing rights which are valued at another 1%, the originators (Wells Fargo, JP Morgan, Bank of America) are making almost 8points on a standard plain vanilla conforming mortgage.

Historical spreads of what’s known as the “primary-secondary” spread show that mortgage rates are actually higher than they are supposed to be.  The current coupon mortgage rate measures the yield of the hypothetical par mortgage (30yr 3’s trade at almost 104 so there’s no tradable par bond).  Today that rate is 2.34%.  The average 30yr mortgage rate to borrowers, as measured by Bankrate, is currently 3.61%, or almost 130bps over the current coupon rate.  Longer term this primary/secondary spread averages closer to 70bps, not 130bps, so rates are about 50-60bps higher than they should be here.

The Value of HARP Loans

HARP loans are particularly valuable in the eyes of investors due to prepayment friction.  A borrower may only “HARP” a loan once.  As these borrowers are generally all under water on their loan, it isn’t feasible to finance into a standard loan.  As such, these borrower are trapped in these loans.  The street, with good reason, projects these mortgages to prepay very slowly going forward.  To mortgage investors, the stability of these cash flows due to extremely low prepayments is worth significantly more than the average pool.

Our example above showed that a 4% mortgage rate would trade into a 3.5% pool which is a $5.75 profit to the bank excluding origination.  The value of HARP loans can vary, but these typically trade up at least 2-3 points over TBA collateral.  ”TBA” is the industry jargon for generic new collateral.  So if a 4% HARP loan was originated and quoted at +3, the price would be $105.75 + $3.00, or $108.75.  Add on the origination and servicing fees and near 11 point profits are being earned.  

Lack of Competition is the Driver

One of the quirks with the HARP program is that you’re only allowed to enter into a HARP loan with your original servicer.  Noted mortgage analyst Laurie Goodman of Amherst Securities explains, “HARP 2.0, announced in November 2011, introduced significant new benefits to servicers for refinancing their own loans. In contrast, different servicer refinances received at best marginal improvements…This tends to lock a borrower into refinancing with their existing lender, which conveys tremendous pricing power to the banks. A lack of competition has allowed current servicers to charge higher rates to these borrowers, when the economics of origination would suggest lower rates are in order.  And borrowers have little choice but to pay the higher rates, as the rules favor same servicer refis to a very strong extent.”

The Menendez/Boxer bill being tossed around Congress proposes to allow borrowers to enter into a HARP loan with different mortgage originators.  This would ostensibly create greater competition and lower profits for the three main originators (Wells Fargo, Chase, and B of A).  To nobody’s surprise, the big banks are adamantly against this proposal and it’s easy to see why.  Not only would their oligopoly on HARP loans be put into jeopardy, but the extra premiums which are able to be extracted would also go down.


While it is encouraging that more and more underwater homeowners are gaining the benefits of today’s low interest rates, tremendous profits are being made at their expense. Lack of competition is the primary catalyst, but the underlying economics of the large “too big to fail” banks will do nothing but stoke additional anger in the general public.  Expect this trend to continue until the dynamics of the program is changed once again, possibly in HARP 3.0.  Until then, the cash cow will continue for the TBTF banks.

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Xibalba's picture

any idiot can make a simple thing more complicated.  

Michael's picture

Breaking News;

Standard Chartered: Who are you Fucking Americans to tell us who we can do Business With?( something like that just heard on CNBC World) in reference to doing business with Iran.

Ahmeexnal's picture

Breaking news:

Obama's congratulation call to Michael Phelps audio has been released:

Phelps:  "uuuumm....hulloooo?"

Ogolfer: "You didn't win those medals, you didn't break those records"

ACP's picture


Is that a reference to that fact that Bush Dubya played 24 rounds of golf during his entire Presidency, while Obama has played 100 rounds of golf before the end of June 2012?

A Nanny Moose's picture

"The last official act of any government, is to loot the country."

This is far easier with Rahm whispering in your ear, "It's OK, we got this handled, you go do...whatever it is that you do, Barry."

Manthong's picture

Well, if they are laughing it must mean that the Fed is meeting some new nominal mandate.

Let's measure happiness, Ben Bernanke says

Michael's picture


I'm getting real sick and tired of the left wing extremists pushing their man made global warming climate changing meme on us. It's solar max for Christ's sake.

I live in SW Florida and have witnessed the invasive species of the Iguana's freezing to death in the past few years. Prepare for it again when the Sun enters solar minimum a few years from now.

Frozen Iguana - Frozen to Death in South Florida


Caggge's picture

Since business is all about risk. The more risk you take the greater the reward supposedly is. I guess banking representatives should be the lowest paid employees in the job market. Since they can't fail because they get bailed out of their mistakes by the taxpayers, we need to pay them accordingly. Lets start paying jobs for their value to society and the amount of risk that is taken.


LLoyd!!  Here is your yearly paycheck. $10.00. Don't spend it all in one place.

shovelhead's picture

1 Frozen Iguana please...

Salt the rim and hold the lime.

Gazooks's picture

Then it's time to elect someone with some real rootin' lootin' credentials.

"I'm not familiar precisely with what I said, but I'll stand by what I said, whatever is was" - Willard Mittins Romoney May 17, 2012

Mitt Romoney: for when the moment's right.

ACP's picture

Here's something simple: Part out your house before your foreclosure. Completely. Leave the bank a slab.

MachoMan's picture

I suggest to all who read this advice to look up your state's laws on damaging mortgaged property or selling fixtures from mortgaged property...  hint: they've already thought of this one.


HARP/HAARP- One pushes debt on humanity and the other pushes death on humanity...or some combination hereto. 

Death and Gravity's picture

Careful. Do not prod the restless hordes of conspiracists waiting in the wings...

Redhotfill's picture

Was there a point to this?

slewie the pi-rat's picture

cash cow to banks?  mortgage rates too high, given zirp? 

there has been quite a bit of online ink abt this shit, and there seems to be an underlying desire of the banksters and the pols to somehow try to control the downside...  foreclosures

one perspective on why things are seeming bullish in RE while everything is still basically the shits:> 

The Mystery of Rising Housing Prices

hardcleareye's picture

Good read.  He forgot to mention about the lack of mark to market value of the underwater/defaulted loan and the how and when the losses are marked on the banks books.   Can you say INSOLVENT......  if this happened the FDIC will have a lot of business.  It's going to be a slow and painful bleed out.

Atlantis Consigliore's picture

Forward. Foreclosure You Can Believe In.

with a Harp, Hamp Pump, Chump Dump, Lump, Bump, Pimp, Hook in Their Fanny, Freddy Rump;

Forward.  Foreclosure You Can Believe In.  

mt paul's picture



vinu02's picture

i find it ridiculous but the wooden house which was sold over 300-500k range in 2007, should be less then 20k .



Gargoyle's picture

Not to mention that a new loan means an end to any questions of a clear title.  The final shovelful of dirt on the now-buried robosigning "scandal".

jonjon831983's picture

er body is laughin

"Treasury may let investors pay to lend"


aka getting ready for -ve rates.

Poor Grogman's picture

You see
The global debt ponzi IS your friend..
Helping debt slaves keep their head above water.
One mortgage at a time....

2discern's picture

Do people remember or know why their homes are under water?

hardcleareye's picture

Nope...  "Profit has no loyalty and greed has no conscience."



Never One Roach's picture

"CHICAGO (Reuters) - Russell Wasendorf Sr., chief executive of failed brokerage Peregrine Financial Group, had $6.9 million in life insurance and a debt on his private jet when he attempted suicide last month.

A receiver for Wasendorf, who in July confessed to stealing more than $100 million from the futures broker's customers over nearly 20 years, detailed the value of the plane and insurance policies in a court filing on Monday and said he was preparing to unload them as assets.

Peregrine, commonly known as PFGBest, filed for bankruptcy protection on July 10."

The only 'Q' is why did he confess? There's alot more to steal out there according to Crazy Eddie. There must be dozens of these roaches crawling around, as Eddie made clear in that RT interview.



radicall's picture

I am thinking of getting a refi with my credit union. 

cnhedge2's picture

eurozone political season of NEAPs (New, extreme or alternative parties)

hardcleareye's picture

Profit should be about risk and rewards, the greater the risk the greater the reward.

When I look at an investment I always ask myself is the "risk" appropriately priced. 

These loans are underwater, there is a risk both in repayment and in the asset continuing to lose value.  The economy is on a downward slide the bottom not in sight, if it was my money being lent I would want more than 11 points to buy down my risk.

That being said, the bankers have not been appropriately punished for originating those loans in the first place and until that happens the above argument holds no water. 

You have to clean house first, and at least an "appearance" of justice has to be established.

zhandax's picture

Indeed; until all the originators and purchasers of these loans have had their remaining assets sold in bankruptcy for pennies on the dollar, this blight has not been purged from the system

LMAOLORI's picture



"That being said, the bankers have not been appropriately punished for originating those loans in the first place and until that happens the above argument holds no water. "

Report: Cronyism, political donations likely behind Obama, Holder failure to charge any bankers after 2008 financial meltdown


How Obama Enabled Unscrupulous Banks to Foreclose on Innocent Homeowners

Bear's picture

"The Federal Reserve chairman said Monday that gauging happiness can be as important for measuring economic progress as determining whether inflation is low or unemployment high. Economics isn't just about money and material benefits, Bernanke said. It is also about understanding and promoting "the enhancement of well-being."

He just fishing ... you can be happy without QE ... right?

Poor Grogman's picture


Are you " happy" with the Feds performance since 1913.

1. Extremely happy
2. Somewhat happy
3. Indifferent
4. Not very happy
5. Extremely unhappy

6. None of the above. (please use reverse side to explain)

Thanks for completing the annual fed happiness survey....

Bill Shockley's picture

What I need is a cheap home loan cause my box isn't up to code and the local bloodsuckers won't lend me money even tho I am current, never missed a payment, etc.

Been paying for 32 years thru 12% interest in the '80's and a divorce in 2006(another refi).


Now I am stuck at 6%.

At night I weave a rope from my own hair for bankers.




shovelhead's picture

Now you know why husbands take soon to be ex-wives fishing.

Very cost effective.

OldPhart's picture

Not mentioned in any of this HARP bullshit is that those of us who were responsible and made our payments continued to get shafted.

My house was purchased in 1998 for $75k.  It's modest, about 1500 sf, 4 br 2 bath, 2 car garage and one acre.  At the peak of the ponzie the valuation of property around the neighborhood was $350k...mine probably around $325k.  I didn't get a second, I didn't draw equity, I didn't do anything except pay my 30 year fixed, 7.5% payment (with escrow) of around 750/month.  Usually I paid $800 to $1000 a month with the excess applied to principle.

In spite of being on the 'DO NOT FUCKING CALL' registry, I got a couple of HARP marketing calls and I finally got curious.

I got a call and I told them I was interested in getting my interest lowered from 7.5%.  The interest rate had the guy excited.  He started talking about getting a new package designed to drop my rate down to 3.5%.  To me that would be great.  I could make the same payments and pay this bitch off sooner.

He asked me how far behind I was.  I told him I was paid into November.  He asked, to clarify, if I was almost a year behind on my payment.  I told him I was prepaid into November 2012.

He stuttered a bit then asked me what my balance was.  I told him it was around $40k, maybe less.

I was told that I didn't qualify because

  1. I was not behind in my mortgage,
  2. I was not 'underwater', and
  3. My balance was less than $100k and it was not worth the refinancing cost to work.

So I am blessed with the privilege of continuing to pay my 7.5% interest rate while those that idiotically bought their little castles and McMansions or drained their equity to buy vacations, toys, and boobs will be allowed to drop their rates and have payments adjusted to what I've been paying all along.

Our government has created a system were irresponsibility has become profitable.  There is no penalty for personal financial idiocy; rather, we have a system designed to encourage spendthrifts.

And I am forced to support that system with my mortgage interest and tax dollars.

It's time to refresh the tree of patriotism.


Bill Shockley's picture

Same situation for me, makes a guy want to play with matches.


ebworthen's picture


(and sounds familiar)

zhandax's picture

No good deed goes unpunished?

skipjack's picture

Pay off the mortgage with a home equity loan.  They're a lot easier to get.  Go to your local credit union with whom you've had an account for a few years of history - you ARE banking with one, right ?  you left a tbtf bank 4 years ago, right ? - and get that home equity loan at 3.5% or thereabouts, for exactly the payoff to the mortgage, no more.

toomanyfakeconservatives's picture

Obama golfs while America burns! But rejoyce... the MASS ARRESTS are imminent...

Currency is Debt's picture

“A small debt produces a debtor; a large one, an enemy.” 
Publilius Syrus Quotes

 “And to preserve their independence, we must not let our rulers load us with perpetual debt. We must make our election between economy and liberty, or profusion and servitude.” 
Thomas Jefferson Quotes

“Debt is the slavery of the free.” 
Publilius Syrus Quotes

 “I go on the principle that a public debt is a public curse.”
-James Madison

“The borrower is servant to the lender.”
-The Bible

“When you get in debt you become a slave.”
-Andrew Jackson

Currency is Debt's picture

The world for mankind is dictated by force not by reason. This is certainly how it has been atleast the last 500 years.

Think slavery, think empires, think World Wars,

In much of the world slavery,exploitation and war are still today in our modern virtual internet iPhone world.

Many countries are as vulnerable to a military attack as countries in Europe are to a Bond attack

Recessions, depressions, bubble, bust, inflation, deflation and debt for the many metropolises of the world. If they want to steal they can steal, change the laws, change the rules, change the accounting, redistribute, increase tax, vat, pension ages, fix prices, support asset classes, "borrow" the money from tax payers, confiscate Gold - whtaever they want, whenever they want - force. 

Being aheep means not having to dare, risk, try. We are coasting. Is force the only solution?

Looks like the good men left in the world are fewer than the corrupters. Things are starting to lose their reason.

zhandax's picture

Think slavery, think empires, think World Wars,

You are thinking sovereign lending; typically the most profitable.  Not lending to Bill and Tom on their mortgage; until 1988, a loss leader

max2205's picture

Banks are over charging on 30 yr loans

Over 50% on rate , loan vs 30 yr bond.

We get ripped off even in a zirp environment

Nothing changes. Nothing

GMadScientist's picture

Damn you Boxer, you "socialist"!