The Banks Win, Again

41 | By 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 accidently 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 servicer 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.


41 Responses to The Banks Win, Again

    • Greg Ginther says:

      So that is why buffet bought so much B of A a while back… you think he knew anything about this…?

    • Michael says:

      Not to defend the banks – they do all of the things all of the other comments say they do. But I am surprised that no one seems to realize that a lot of these “underwater” loans were brought on by the homeowners themselves. I know a lot of people who discovered in 06-07 or so that their homes had dramatically increased in value due to what we now know was a real estate “bubble”, so decided to re-fi or, if they had no loan to take out a loan, at 75-80% of the inflated value. What happened to the proceeds I do not know. Some of it was probably invested in other investments that turned bad, some was just plain spent. It is hard to have a lot of sympathy for them.

  1. JM Schroeder says:

    I wonder how many of these loans will eventually be non-preforming. Probably, a significant percentage. This will just result in a greater fall for our country economically.

  2. Robert Stephenson says:

    Yeah go figure I am struggling just to make my payments and pay my chapter 13 arears. That’s not counting my property taxes.

    • Peter says:

      The government won’t help the underwater homeowner because they cannot afford to buy their own elected officials. Only the banks can afford to do that.
      It’s really that simple. Don’t complicate the issue. Banks pay – We lose.

  3. JohnD says:

    Great stuff–keep it coming Shah! You may be hearing appropriate, sarcastic quips from knowledgeable insiders, but there are very few good men who are willing to publish them like you do.

  4. Owen K. says:

    Of course the big banks win again. They will always win again (up to a point), due to the fact that they are members in good standing of the international banking cartel. Don’t believe me? Read the book, “The Creature From Jekyll Island,” by G. Edward Griffin. You will get the entire ugly story about the cartel and its range of power over governments and nations. A recent article that appeared in the WSJ, talks about the FED (a key member of the cartel) now buying U.S. debt at the rate of 61%. The question is; how long will the cartel be able to keep their power and their schemes to prop up fiat currency?

    • voteright says:

      Owen: I am glad someone else is touting the book about the “Creature” –I have been telling people about this book for over two years. In fact I bout a case of the book and donated to the local Tea Party Chapter to be distributed among High School and College Students.

    • art h says:

      You know it seems like nobody pay any attention to the law, at least they no longer enforce them. I can now understand why Bonnie and Clyde and the like robbed banks.

      Robbing banks is just another form of banking……………

    • Vickie says:

      The immunity was also granted by attorney generals of certain states who pushed for the big banks so they could build their election campaign funds from the same benefiting to-big-to-fail “Creatures”.

  5. Bill says:

    The banks and regulators have gone too far the other way from being lenient to not lending at all. Small business gets caught up in this and can’t get capital for renovating or even payroll. We have now turned to private sources like companies that buy your advance credit card sales for a fee so that we can have some cash to work with. Instead of paying the bank 5 to 6%, we are paying these companies 40 to 60% just to remain solvent.

    Small business will not make it in this political environment unless the regulations get back to some where between what they used to be and what they are now and it better happen fast.

    • Ed the Grocer says:

      It would be good to know how much of the “personal debt” curve from the last five years was actually small business using their personal credit cards for business loans. ( at 20% of course ). My small western Canadian industrial town was cut off from credit over fifteen years ago. bless their dried up little hearts.

  6. Mark Leach says:

    hello, i was told by a lender if i had a sallie mae loan i could refinance for next to nothing up to 175% load to value but since i have a fannie loan i can only refinance up to 80% ..? who is telling me the truth….i would love to refi at 4% or so but i am at 95% or so? what is the truth? thanks…mark

  7. colin adese says:

    Shah it’s called a trade-off short-term, my guess, duh, late november ( back in ’63 ) early december. ” and you can tell the birds and bees. . . .and everybody knows because you told them once before. . .it aint no secret any more”. Bye ya’ll

  8. Jay Curtis, author of THE CODE says:

    Well, again Shah, you get my attention with an insightful and important revelation. Write an oped piece for the WSJ and see if it gets in? These things go under reported because they are complex and the “objective” media needs super simple things their readers and viewers can understand in five words or less while the right wing media owned by the banks and other mega rich malefactors won’t report it because they don’t want to upset their buddies.

    Things in this country are getting worse by the minute. The Supreme Court has become a partisan right wing super legislature. Congress (both parties pretty much) is owned by Wall Street and the uber-rich individuals and corporations. Disinterested and easily deceived voters buy the lies in political ads and vote against their own economic and social interests. Civility in society and politics have given way to hatred, vitriolic personal attacks and 100% pure partisan bias (as well as outright lies) in “new” channels. Hell, if Canada weren’t so damn cold in the winter I would have already moved there.

    • Mark Marohn says:

      Why do all the people from the US assume that a move to Canada would solve all their problems they experience in the US. I am a US citizen who moved to Canada in 1989. Many of the same problems are here in Canada. There are even other problems particular to Canada. You need to do some real research into life in Canada.

  9. Penny says:

    My husband and I purchased a rental home in Arizona in 2005. We put 20% down and have faithfully made all payments. It is currently valued at 50% of what we CURRENTLY owe. We received a letter from the loan servicing company that we qualify for a HARP 2.0 loan. It would reduce our interest rate from 5.25% to 4.0%. Sounds great? No. It actually would increase our payment by $20/mo. because it would take us back to a 30 year loan, not the 24 years we currently have left.

    • jj says:

      Something doesn’t add up on your refi…

      For a fixed rate loan, if the amount is the same, the interest rate is lower and the term is longer, then the payment must be less. That’s simple math.

      If the payment is higher, then something else must be different.

      • Nancy Baumann says:

        The additional costs are probably the loaded up closing costs that Shah said would go to the insurance, title company, etc., etc, rolled into the principal. What a sham.

        We are retired and trying to live off SS and what is left of our investments. When I read about what the big wigs do it is sickening. We worked and paid and saved. God willing it will be enough and thankfully, it looks like Obamacare may be gone.

        Financial folks forget the citizens. Work and schedules and feeling grateful for a job and a place under the sun was our mantra!

        Always appreciate your wit and going behind the scenes reporting, Shah. It helps some. Thanks.

        • Ed Binion says:

          Grr! look at the fees and increased term of the loan! Youll have went back to square one! May save the house, it increases your long term debt with barley enought left to bya a few trinqets! You should stuckst by your guns in the biginnning’! The added tIme.The added others that are must have if you have goto refi! THey are making bank on these program just so you can offord what you rally couldnt the first time Any major catastrfy will sink you with outside help. I flip foreclosures for a living ,
          Your feeding a monster that does not care about you!!!

    • Michael says:

      That doesn’t make sense. Payments on the same principal amount for a 30 yr loan would be less than those on a 24 yr loan, even if the interest rate was not reduced. Somebody isn’t giving you the staight story.

  10. Mike says:

    Folks, we all know what is going on and why, so what is your strength in all this? It is like your vote (that does not work as we get the same thing year after year), the answer, when the time is right, we all stop paying our mortgage payment and let the banks eat it. You then have house that you and your family can live in for ever and they (the government) do not have enough jail cells to put us all in anyway. timing is evrything.

  11. James says:

    If you are an investor, one of the best sectors to put your money in now is guess what? …banks. It is a no brainer. Watch your bank stocks grow by leaps and bounds in the coming months. Forget the clutter … the politics … the immorality … the stinking smell.

    Hold your nose and invest in banks.

    Thanks Shah! This is what we subscribers are looking for when we subscribe to investment advisories. You do it with clarity.

    Another comment. My son and his wife (mid-thirties) have a mortgage under water and they immediately went back to their bank to apply for refinancing when the new HARP was implemented. He said, if approved, his new mortgage is going to free them with an extra $700 each month. They’ll find out in June. Do you know what this means for our economy when all these underwater mortgage holders obtain refinancing under more favorable terms?

  12. Ed Morewood says:

    Apparently those lobbyist salaries are an excellent investment.
    Maybe Average Joe should think about having his own Representatives?
    Oh, wait…

    • Peter says:

      Using the word “lobbyist” without clearly stating that it is simply bribery with a legislative label on it simply encourages the behavior.

      Call it what it is – buying the votes of elected officials for cash and other valueable consideration.

  13. Kevin Donnelly says:

    Monetization will make it all right —for the Banks, it’s just another turn of the screw and a little more juice comes out

  14. Dom says:


    Had a question concerning your analysis of the housing market here and in the other article you published in Money Morning.

    In the MM article, you mentioned that the ‘putbacks’ were one of the main detriments to fixing housing. Granted, it was 1 in a plethora of ‘supply chain’ like problems in the housing market. If I remember correctly, F&F being able to ‘putback’ any loans / MBS they had that turned bad to the banks they bought them from was a bad thing. Here it seems that HARP 2.0 no longer allows F&F to do that, but this situation is just as bad.

    Please explain this here if you got a minute. Granted, I am picking detailed items here. Mainly just trying to gain a clearer picture of the housing situation and the role of putbacks here.


  15. ASHLEY GOODMAN says:

    We seem to forget that it is the Federal Reserve that controls our money supply and consequently our financial destiny and it is a private corp. The Fed is owned by the Banks. The Chairman is our real unelected President. The other guy his puppet. The so called citizen taxpayer, the victim is always being skinned. I have watched it happen repeatedly. The theme being what is good for the banks is naturally good for the country. I watched our so called protectors, that disgusting bunch of ass licking incompetent legislators we call Senators humbly question Benji Bernanke about the State of the Union and its finances. It made me sick. It was so sad. I almost cried for me.
    A goodman

  16. Gordan Finch says:

    They are all interbred crooks in suits, but then they always were. Banks, Insurers,Government and some corporates are fraudsters. Browse UK Government accounts on itsfraud . com , Goldplated. Its an obscene insanity the Government spend on non contributed civil service pensions is £1 trillion,132 billion, 300,000, 54% of revenue.

    Figures for Ministers, MPs and Parliament-pensions are included but hidden,??? within the £trillion+ figure above. And banks and Its hidden Insurance subsidiaries are still being givens taxpayers money to keep them afloat.

    But then how many commenting are exposing the fraud.

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