Proposed Market-Based Mortgage Modification Program
This Program was developed over four years of intense research and developmental work and is patent-pending; the Program utilizes market forces very effectively to cause each participant to want to participate and fulfill all Program obligations. We believe the Treasury Department is aware of the Program. We have been meeting with many state governments to explain the Program and why it will work effectively and efficiently when all others (including HAMP) do not seem to be. As an added benefit, this Program completely eliminates all Freddie Mac and Fannie Mae MBS exposure on any mortgage modified through this Program. Likewise, if implemented federally, the Program substantially reduces FHA insurance and VA guarantee exposure.
Program Overview:
Recently, a state government official summed up the program after my presentation with "this is the only Program puts together those that have money (Investors) with those that need money (Homeowners)." Homeowners pay interest and Investors receive interest for use of their invested money.
Homeowners, Investors and Servicers (or Mortgage Holders) register and enter data on the secure Program website. Homeowners bid monthly payment and Investors bid interest rate. on the secure Program website The Investor interest rate bid is added to the Program's insurance premium (and Program fees) rate resulting in the total Homeowner interest rate. Program algorithms match Homeowner monthly payment bids with Investor bids to maximize resulting principal amounts to deliver the most positive results. The total interest rate and the Homeowner’s monthly payment bid together build a principal amount. Servicers (as fiduciary for the Mortgage Holder) accept or reject this principal amount by comparing it with the total amount owed on the existing mortgage. Servicers (or Mortgage Holder) can communicate with the Homeowner through the Program's website. Once Servicer accepts calculated principal amount to pay-off existing mortgage, the terms of the new hybrid financial security – the Home Certificate – is fixed. Owners of the existing mortgage (“Mortgage Holder”) IMMEDIATELY receive maximum cash from the modification process, Servicers are immediately repaid all Advances (like they are in a foreclosure or a short-sale but not a traditional modification)., if any, and the initial Program insurance premium is paid into the Program's insurance fund. If existing mortgage is partially paid-off, the Mortgage Holder can receive more cash (a portion of the Deferred Recapture Amount) when the home is redeemed from this Program.
The fair market value of the home is not considered in processing a modification through this Program due to the Program's zero-subsidy insurance fund acting as primary security for Investors. The fair market value of the home is only considered in determining the amount of the Deferred Recapture Amount that the Homeowner earns and never has to pay. This Program can modify all existing secured loans at one time by passing acceptance control from the first mortgage Servicer to Services of subordinate loans in their order of priority.
The new "mortgage" (the "Time-Out Mortgage") is an interest-only loan. The term of the Time-Out Mortgage affects the Homeowner's interest rate (think treasury rates, 10 year about 2.54%, 5 year about 1.39%, 2 year about .5%). To the extent the term is shorter rather than longer, the Homeowner will be exposed to interest rate risk. Since the Home Certificate has several benefits that Treasuries do not (profit from participating in Deferred Recapture Amount, if Time-Out Mortgage defaulted, Investor can opt to take title to home rather than insurance proceeds, interest-rate windfall if mortgage is repaid early), they could be as or more attractive to an Investor than Treasuries.
Home Certificates are risk-rated securities and are issued in a traditional manner through the Treasury Department or an investment bank. Master Home Certificates are equivalent to mortgage-backed securities (MBS), and will likely trade in a secondary market. Master Home Certificates are created by an owner of more than one Home Certificate requesting that the individual Home Certificates be listed in one Master Home Certificate.
The existing mortgage is fully or partially paid-off in the modification process from the issuance of a hybrid financial security (the Home Certificate) with existing loan paper being assigned to the Program and tracked through MERS, thereby maintaining the process as a modification.
All Fannie Mae and Freddie Mac exposure is PERMANENTLY ELIMINATED for any mortgage that is modified through this Program. If implemented federally, FHA and VA exposure is significantly reduced as the Program's insurance fund is layered primary to FHA insurance and VA guarantees. If implemented at the state level, the Program's insurance fund is protected by any FHA insurance and VA guarantees that exist.
If a Homeowner has a Time-Out Mortgage, the house can be sold by simply assigning the Time-Out Mortgage (and the monthly mortgage payment obligation) to the buyer. The Homeowner still owns the house so it can also either be sold traditionally or by assigning the Time-Out Mortgage plus payment of any additional amount to the seller Homeowner.
The Program can be viewed from the following perspectives:
From the Homeowner’s viewpoint, the Program: stops collection and foreclosure proceedings for me as soon as I enter the Program; allows me to stay in my home, and keep my kids in their school; provides me with financial counseling to help me determine an affordable monthly payment; my monthly payment is reduced to an affordable amount; my existing mortgage loan is paid off without me having to sell the house in a short-sale or my current lender reducing my principal amount; and I can pay off my new mortgage at any time without penalty. I can refinance into a traditional thirty-year fixed mortgage at any time, once I can qualify for that type of loan. If I want to sell my Home, I can just assign my Time-Out Mortgage to the buyer and the buyer takes continues to make the same monthly payment to the same Servicer. If I can sell my home for more than I owe on my Time-Out Mortgage, I make the profit on the sale and pay-off the Time-Out Mortgage from the sale proceeds.
From the Investor’s viewpoint, the Program: provides me with an safe, insured investment vehicle with a stated interest rate that I choose and a possible substantial windfall return (I can get long term rate for a short term investment and share in Deferred Recapture Amount); in the event of a Homeowner default, I can choose to take title to the home or to get repayment of the amount I invested (I would likely do this only if home prices increase to the point that the home becomes worth more than the amount I invested); and my investment is liquid since it is tradable on a secondary market and can be pooled into an investment security.
From the Mortgage Holder's viewpoint, the Program: permits me to maximize my return of capital; most Homeowner borrowers will be able to substantially or fully pay the full amount due to me; foreclosure will be my last resort, to be used infrequently.
From the Servicer’s viewpoint: I can receive payment of the full amount due to the Mortgage Holder under the current loan I am servicing,. If I cannot obtain full payment of the balance of the existing loan, I can still obtain the greatest value for the Mortgage Holder through accepting a partial-payment modification through this process. I do not need to be concerned about not being able to legally agree to a modification without the Homeowner being in “imminent danger of default”, I will continue to receive my servicing fee on the new Time-Out Mortgage. I immediately recoup my Advances.
From the public’s and government’s viewpoint, most financially distressed and underwater Homeowners will be able to modify their mortgages within three months of Program implementation, huge reduction in housing supply which will tend to stabilize, if not, increase housing prices thereby alleviating decreasing pricing pressure on the housing market which will allow Time-Out Mortgages to be replaced with traditional 30 year fixed rate, self-amortizing mortgage loans over time, no government interference with private contracts, only Homeowners who enter the Program will incur the costs of running the Program from Program fees. Due to the zero-subsidy insurance fund which is wrapped around the Program, pressure on existing government housing guarantee and insurance funds will be substantially relieved. Also, in the event of a default by the Homeowner, since the Investor can take title to the home instead of making a claim against the insurance fund, the likelihood of a claim against the insurance fund is significantly decreased in the event the fair market value of the property exceeds the insurance claim. If the Program as contemplated, over time, housing prices should stabilize and then increase due to the huge decrease in housing inventories nationwide. Freddie Mac and Fannie Mae mortgage-backed security guarantees are eliminated on mortgage loans modified through the Program as they fall out of the MBS pool; this protects taxpayers from the current black-hole GSE exposure.
Links to materials: