HARP-Mania: Catch the Wave or Let it Pass?; BofA Introduces ‘Mortgage to Lease’

Bank of America launched the “Mortgage to
Lease”
program to fewer than 1,000 BofA customers selected by the bank in
test markets in Arizona, Nevada and New York. “Participants will transfer their
home’s title to the bank, which will then forgive the outstanding mortgage
debt. In exchange, they will be able to lease their home for up to three years
at or below the rental market rate. The rent will be less than the
participants’ current mortgage payments and customers will not have to pay
property taxes or homeowners insurance”.

I received
a note on the FHFA’s pilot program for tuning
REO’s into rentals
. “It is clear that the policy focus is shifting
from not only preventing foreclosures to also efficiently disposing distressed
properties, which needs to be done. Any plan to turn REO’s into rentals is
appealing because it helps to accommodate the dramatic population shift from
ownership into renting. There have been 4.2 million new renters since the end
of 2006 and 1.2 million homeowners lost over the same period. The backlog of
foreclosures – another 7.5 million in the pipeline – will continue to
transition homeowners to renters over the next few years. There is not enough
rental inventory to meet this demand. This program has the potential to affect
a significant portion of the market, even if it just focuses on government mortgages.
But there are problems, and I have seen estimates of upwards of about 3 million
government mortgages liquidated over the next four years or so – about 40% of
the total foreclosure pipeline. About half of the current REO inventory is in
only 20 metro areas. Even if the program only focuses on these 20 metro areas,
it can capture about half of the total pipeline, which means about 1.5 million
mortgages.”

The note continues: “There are three primary ways the REO-to-rental program can
support the housing market and the economy. Removing foreclosures from the
for-sale market reduces competition for voluntary sellers, underpinning prices
of non-distressed homes. In addition, clearing foreclosure inventory will help
to equilibrate the market, creating opportunities for new single family housing
construction. And finally, converting single family homes into rentals limits
the upward pressure on rents. There are concrete positives of a REO-to-rental
program and given the importance of getting the housing market back on its
feet, so why not give it a shot?”

The
government determines so much of our lives now – we may-as-well let the
government rate stocks and bonds, right? Moody’s posted a paper by CEO Ray
McDaniel on its website that says governments
should create a credit rating agency
. “Public institutions that have
both the expertise and credibility among market participants should provide
credit views on sovereigns,” McDaniel wrote in “A Solution for the
Credit Rating Agency Debate
“.

In other
rating agency news, Kroll Bond Ratings
released its residential MBS presale
, Sequoia Mortgage Trust 2012-2 where
it assigned preliminary ratings to seven classes of mortgage pass-through
certificates. 366 first-lien mortgage loans with an aggregate principal balance
of $327,935,218, originated by primarily First Republic, PrimeLending, PHH, and
Flagstar, and serviced by First Republic, Cenlar, and PHH. All of the loans in
the pool are 30-year fixed-rate mortgages. 10% of the loans are interest-only
for the first 10-years (the remainder is fully amortizing). The LTV’s are
low with an average LTV of 63.5% and CLTV of 66%. No loan has an LTV or CLTV
greater than 80%. More

Speaking
of controversy, how ’bout this HARP
stuff? First folks are excited about, then they’re not, then they’re not… Here
is this note: “I have observed that aggregator investors are charging more for
HARP II loans (price adjustments = fee).  Yet, while Fannie accepts the
value risk on DU PIW loans, these investors are not expressly waiving the representations/warranties
originators make around value.  In fact, many are adding on their own LTV
overlays which could also pose future repurchase risk for originators who trust
the PIW is accurate. It seems to me to be the stated income loan issue all
over again, as Fannie seems to accept that since they already have the value
risk today, that it really doesn’t matter what the property is worth on these
refi’s.  As long as it reduces the payment for the borrower, it makes the
loan less likely to default.  Thus, any refinance of the debt resulting in
a lower payment lowers Fannie’s risk of loss. Will aggregators remember
the reason why this refinance program was established if losses start to pile
up later?”

Attorney
Brian levy wrote, “Just like with stated loans, investors are charging a
premium to accept a ‘higher risk’ loan due to ‘stated’ collateral value. 
Yet, unless the originator is selling directly to Fannie, I have not seen any legally binding confirmation that the investor has
actually accepted that risk
.  Given recent history, it is dangerous to
trust that investors will not seek to mitigate future losses on these loans
just as they have done with stated income loans.  Unless originators are
able to modify their loan sale agreements now to confirm a waiver of reps and
warrants as to value on HARP II loans, in a few years I suspect I will be
defending repurchase claims against originators alleging either they failed to
provide accurate data in DU submissions or that LTV overlays were breached
despite what the PIW says. (Mr. Levy can be reached at blevy@kattentemple.com.)

And
indeed, in this environment where practically
every lender, big or small, is “running scared,” trying to maximize the
benefits to the borrower while minimizing repurchase risk on HARP 2.0 loans, or
any loan, is paramount. After all, it only takes a few of these loans going
bad to wipe out all the profits. In terms of individual borrowers there are
about 2.1 million loans – less than 5% of all loans have an LTV greater than
125%. If approved, originators can either sell the loans directly to Fannie Mae,
therefore using the Fannie reps & warrants, or sell the loans to an
aggregator, in which case the originator is bound by the reps & warrants of
the aggregator, with its own set of issues. Many companies, pointing to
possible “quick trigger finger” of the aggregators in forcing a buyback in the
event the borrower misses a payment, believe that the possible costs far
outweigh the benefits.

I received
this note: “Rob, under HARP 2.0 guidelines, if a property has been listed in
the last six months, it not HARP 2.0 eligible – am I supposed to run a 2055 on
every property
? And what about condos? HOA certificates don’t tell me if the
project is currently Fannie Mae approved, and most projects are involved in
some kind of lawsuit. And how am I supposed to know the LTV, when there is the
possibility that the investor doesn’t want to see an appraisal? I think I’ll
let these loans bog down the machinery of the big banks’ retail channels while
I go after the purchase business they’re ignoring. Preliminary processing shows
the pull through on these will be very low – why waste my LO’s time?” (Editor’s
note: it is well known that retail branches of major banks/servicers are
swamped with HARP loans. Rumors of long backlogs abound, and many analysts
working with banks with the largest amount of HARP 2.0 loans predict that there
is a very high chance that loans with an LTV of 125 % or greater will be
strategic defaults.)

Jim D. writes, “Regarding HARP 2.0 and Freddie – it seems like most
lenders have pulled back on Freddie, and that the unlimited LTV is only a
dream. If you are a condo in a resort area, above 90% LTV is not even on the
horizon. I have found 2 investors that claim they will go to 125% LTV while most
have stayed at 105%. As far as we can see, HARP 2.0 for FHLMC is a
fantasy.”

Another
reader wrote, “One thing that I have found to be tough to put my hands
around is the impact that HARP 2 will have on my business as a
non-servicer/service release originator
. I read the same thing yesterday
regarding that 30% of the refi loans are HARP 2 but the question I have is, ‘how
many of those loans are servicer & borrower transactions as opposed to
involving a 3rd party like my company?’ I am to believe almost all of them
because the program until this month was only able to be done manually so that
would give the direct servicer the exclusive advantage. I just find this lack of clarification to be troubling because
originators and some uninformed people in management read these things and
think that by not doing this product that we are missing the boat when I do not
even think we can buy a ticket to board the boat.”

For many originators, watching the markets and interest rates pales in
comparison to this stuff, and I agree. But yesterday Initial Jobless Claims
were below forecasts, and are now at a rate not seen since July, and Leading
Economic Indicators came in above expectations – further lending credence to
the “slow growth, but growth nonetheless” thinking. (The FHFA House Price Index
was unchanged in January – it’s better than being down, right?) Our U.S. 10-yr
T-note spent much of the day sitting around 2.29%, closing at 2.28%, and MBS
prices ended nearly unchanged.

For today
things are pretty slim, news-wise, although we’ll have New Home Sales for
February at 10AM EST. In the early going, however, rates are slightly better with the 10-yr down to 2.25% and MBS prices
better
by about .125.

Here are the answers to yesterday’s quiz. Please, no whining, arguing, or sending nasty e-mails about these:
1. The one sport in which neither the spectators nor the participants know the
score or the leader until the contest ends: boxing.
2. North American landmark constantly moving backward: Niagara Falls. The rim
is worn down about two and a half feet each year because of the millions of
gallons of water that rush over it every minute. (I first thought of the cable
cars out in San Francisco.)
3. Only two vegetables that can live to produce on their own for several
growing seasons: Asparagus and rhubarb. (A few folks might think artichokes,
which are actually a “perennial thistle”, and horseradish, which
actually has to be harvested and its root divided and replanted.)
4. The fruit with its seeds on the outside: Strawberry.
5. How did the pear get inside the brandy bottle? It grew inside the bottle.
The bottles are placed over pear buds when they are small, and are wired in
place on the tree. The bottle is left in place for the entire growing season.
When the pears are ripe, they are snipped off at the stems. (I doubt it is a
growth industry for ex-mortgage bankers.)
6. Three English words beginning with dw: Dwarf, dwell and dwindle.
7. Fourteen punctuation marks in English grammar: Period, comma, colon,
semicolon, dash, hyphen, apostrophe, question mark, exclamation point,
quotation mark, brackets, parenthesis, braces, and ellipses.
8. The only vegetable or fruit never sold frozen, canned, processed, cooked, or
in any other form but fresh: lettuce.
9. Six or more things you can wear on your feet beginning with ‘S’: Shoes,
socks, sandals, sneakers, slippers, skis, skates, snowshoes, stockings, stilts.

 

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