Program DevelopmentTHE MORTGAGE CRISIS
A PROPOSED CREATIVE MARKET-BASED SOLUTION
TO PAY-OFF EXISTING MORTGAGE LOANS WITH SIGNIFICANTLY LOWER MONTHLY PAYMENTS
It is contemplated that within three months of Program implementation, most distressed and "underwater" homeowners, including the over one million currently seeking mortgage loan modification, and all non-distressed homeowners that just want to reduce their monthly payment, will be assisted. While not all distressed homeowners will be able to be helped, the vast majority should be able to favorably participate in the Program to obtain a Time-Out Mortgage.
Please see the White Paper, which is an independent analysis of the Program, written by Andrew Caplin, Ph.D., an economics professor at the Stern School of Business at New York University.
Paul Tvetenstrand, former Managing Partner at Thatcher, Proffitt & Wood LLP (the firm closed due to the downturn in financial services), now a partner with Sonnenschein, Nath & Rosenthal, LLP, one of the leading experts in the country regarding mortgage-backed securities and securitization agreements, has assisted in developing the legal structure for the Program so that it would work with almost all existing securitization agreements. He believes that the “Program has substantial merit and is worthy of serious consideration.” I spoke with an attorney at the Federal Reserve Bank of New York, who, after reviewing the Program, counseled me to continue moving forward with it. I also spoke with a former Counsel to the Committee on Banking and Financial Services of the United States House of Representatives, who viewed the Program very favorably. Note: In the event of federal government implementation, if only mortgage loans that are already federally insured are permitted to enter this proposed Program, the federal government would be accepting NO ADDITIONAL RISK. In fact, due to the nature of the Program, the Program would result in the federal government being in a much more favorable position, especially since the Program derives sufficient funds to pay for Program defaults solely from within the Program itself, without government insurance subsidies. One of the favorable side-effects of the Program if implemented federally, is protection of the various federal and federally sponsored Mortgage-Backed Securities and mortgage loan guarantee and insurance programs, including Fannie Mae, Freddie Mac, VA and FHA (see the Federal Implementation - Insurance PowerPoint available on this site).
This story of this proposed Program starts in early 2006. I had just left the General Counsel position at EDGAR Online, Inc. (NASDAQ: EDGR), and was introduced to Steven Kravitz. Over the next four years, Steve and I worked together days and nights and became almost inseparable and the closest of friends. We thought similarly and developed, with the participation of a few other people, very exciting financial services programs that are now patent-pending.
From August 2007 through July 2008, I was living in South Florida and, on a daily basis, saw the deterioration of the housing market there. Many of my personal friends were so far underwater in their homes that it is unlikely that they will have any equity for many years, if ever. In December 2008, I was again in South Florida and decided to work on a solution to assist distressed homeowners to remain in their homes and remain current on their home mortgage loans. I believed that by utilizing our previous work with a few changes and additions, I would be able to develop appropriate financial model that would work. I worked around the clock for many days analyzing the “problem” from all sides – the Homeowner, the Mortgage Holder(s), the Servicer, and, a new participant – the Investor.
At the time I developed the Program, I believed that it was important for the Program to be voluntary. I also believed it to be important that government did not interfere with private sector contracts. This would have created a slippery slope that could have serious implications for future business dealings in our free-market economy.
Based upon this background, I developed an alternative principal amount (using private sector funds) that is used to pay-off the existing mortgage loan. The basic mechanism is to develop a monthly payment and link that to an interest rate. A monthly payment when linked to an interest rate results in a fixed dollar amount. The fixed dollar amount is then compared with the balance of the current mortgage loan. If the amounts are equal, the old loan can be paid off dollar-for-dollar and replaced with the new loan. The reason why this works for homeowners is that the terms of the new loans are much more favorable on a monthly cash-flow basis than the old loan. This program is only meant to be a stop-gap measure to allow the housing market and the economy, in general, to heal.
There are many more important details to the program some of which are detailed in the documentation available on links to this page.
A very important reason why this mechanism is better than any other “loan modification process” has to do with the typical securitization agreement under which mortgages were pooled and packaged into Mortgage Backed Securities (MBS). Many, if not most, securitization agreements do not permit modification of the loans packaged under them. In discussions with some of the most knowledgeable attorneys in the country regarding the securitization process, related agreements, and servicing, it became very clear that most of these agreements would be major impediments for modifications, since the terms of most of them, did not permit modification. A securitization agreement has an implied term - only if there is “imminent danger of default” can a modification can be considered. This is the reason that many modifications require a borrower to be in default in order to obtain a modification of the existing mortgage loan.
This Program uses market forces to drive each participant to want to participate and accomplish a modification, although in legal terms, the modification is accomplished by extinguishing the old loan and replacing it with a different one with terms that are more favorable to the homeowner. In developing the Program, I viewed myself as a homeowner. As a homeowner, I wanted a reasonable monthly payment that I could afford, I wanted to stay in my home and keep my kids in the school they now attend. I did not want to pay a monthly mortgage payment which was more than what I would pay monthly to rent my own home since I could move down the block and rent there. I then viewed myself as the Mortgage Holder. As the Mortgage Holder, I wanted to be made as whole as possible. I wanted my principal returned and as much income as I was entitled to. I then viewed myself as an Investor. As an Investor, especially in such a volatile market, I wanted complete security – I wanted as little risk to principal as possible and a reasonable return. I then viewed myself as a Servicer. As a Servicer, I want to continue to service the mortgage loan so that I could continue to receive my servicing fee. All this and more is accomplished in this proposed Program. In the Program, as homeowner monthly payment offer increases, the resulting new principal amount goes up and as interest rate offers decrease, the resulting new principal amount goes up. Since the two variables can move simultaneously, the new principal amount is increasing from every variable change. This moves the new principal amount more than the movement of either of the two underlying variables alone.
There are many subtle program terms all utilizing market forces that all build toward the program working well for all participants.
Please contact me for additional information.
Ira R. Hecht