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.