Additional InformationMORTGAGE CRISIS SOLUTION PROGRAM
Additional Information
What we have developed is a framework that can be used to develop private non-bank funds for “modifying” distressed, "underwater," or performing mortgages, for which the Homeowner would prefer a decreased monthly payment. The Program was developed as a short-term solution to a very serious problem. Although, it may not be possible to satisfy everyone’s desires to the fullest extent, we believe that this program is a very viable solution to the current crisis for the distressed Homeowner and the Mortgage Holder. The program has been reviewed by many highly qualified experts and has been labeled “worthy of serious consideration”. We hope that after reviewing the Program you will agree. This may not be a perfect solution but we have been told it is the best solution that the experts we know have seen. Yes, it is not the traditional way residential real estate has been financed but we have a problem that traditional methods do not seem to be able to resolve.
INSURANCE:
My colleague who developed the program with me knows the SBA insurance program exceptionally well and determined it was a perfect fit for our Program.
The insurance part of our program is modeled after the SBA 7(a) government guaranteed zero-subsidy loan program. We believed it to be to our advantage that the federal government was already using the same basic insurance model with another program for many years. This is the same model that OMB uses to insure that the SBA program is self-funded and the government does not incur a loss. This can be a profit center to the government. With this program, unlike the SBA program, the collateral (the house), could be transferred to the Investor in full satisfaction of a defaulted Home Certificate – assuming the program is implemented with a Home Certificate being linked in a one-to-one corresponding relationship with a Time-Out Mortgage – after the applicable Time-Out Mortgage is defaulted; this could be a very substantial benefit and a reason why the Home Certificates may have slightly lower interest rates than they would without this feature. If the Investor does not accept title to the house in full satisfaction of the Home Certificate, the house would be able to be sold, rented, or otherwise utilized by the government, with the proceeds adding to the insurance fund. As home prices stabilize and possibly even rise, the likelihood of an Investor accepting title to the home corresponding with the Investor's Home Certificate substantially increases. If our Program upon implementation tends to stabilize the housing market, as we expect it will, the collateral will maintain value so that even with greater than expected losses, the insurance fund will no only remain solvent, but will likely do very well.
The rates used in the program description were based upon the limited information that we had available. Upon review, OMB will be able to better determine what rates should work taking into consideration much more data that we have had access to. Therefore, the insurance premium rates would be determined after full review. The rates used in the Program materials and in this document are for example purposes only.
Earlier in my career, I worked as an attorney with offshore captive insurance companies and have a good understanding of the insurance and reinsurance markets for certain risks.
HOME CERTIFICATE INTEREST RATES:
The developed framework contemplates a fluid market for Home Certificates. Once created, a Home Certificate could be transferable. The terms of the Home Certificate include a stated interest rate, stated term, and Deferred Recapture Amount, and stated Deferred Recapture Amount Participation Percentage.
The Interest Rate is determined through the use of a bidding mechanism.
The contemplated process is as follows:
Homeowner registers with the Program.
Servicer verifies (1) Homeowner participation and data, (2) mortgage data (including balance)
Homeowner logs into Program System and enters initial monthly payment bid.
Program System utilizes algorithms to match Homeowner bid with Investor interest rate requirement (bid) to develop largest principal amount available at that time.
Servicer views the system calculated bid principal amount (based upon Homeowner bid and Investor bid) to determine if it equals the balance owed on the existing loan. If it is equal, there is no decision to make since the old loan is paid off dollar for dollar. If it is less, then the Servicer can either accept that lesser amount (creating Deferred Recapture Amount) or can send a message through the Program System to the Homeowner telling the Homeowner how much more monthly payment the Homeowner must bid in order for the Servicer to accept the “deal”.
INVESTOR
I developed the Program without any constraints on who the Investor could be. When I thought about myself as the Investor, I considered that I had a substantial amount of money to “invest” but nowhere to invest it due to volatile market conditions at the time. So I developed the idea of a “Super Certificate of Deposit” that anyone could purchase. Since then, the concept has morphed into an investment for Institutional Investors.
The key to the Program working better is for Home Certificate Investor interest rates to be lower as the Investor interest rate and the calculated principal amount are inversely related. If the Investor interest rates move up then the monthly insurance premium would be required to be lower in order to create the same calculated principal amount.
The “Blended Rate” is made up of Investor interest rate, monthly insurance premium rate, Servicer and other fees. The Time-Out Mortgage’s Blended Rate is the “interest rate” that is used to calculate the new principal amount.
DEFERRED RECAPTURE AMOUNT:
The Deferred Recapture Amount is what I call the “underwater” amount that becomes real when the old mortgage is replaced with a Time-Out Mortgage at less than the total amount due under the old mortgage. Since this Program was developed to pay-off the existing mortgage, it was not contemplated that the Servicer (on behalf of the Mortgage Holder(s)) would accept less than the total amount due under the existing mortgage loan. The Deferred Recapture Amount creates only a timing difference to the extent the Homeowner does not bid in excess of the base monthly payment amount which is computed based upon the fair market value of the home. If the Homeowner does bid a monthly payment which is more than the base monthly payment amount, the Homeowner shares in some or, if the monthly bid is high enough, all, of the Deferred Recapture Amount, when it is paid on the redemption of the home from the Program. To the extent a Servicer (on behalf of the Mortgage Holder(s)) does accept less than one hundred cents on the dollar in payment of the existing mortgage, the Servicer must have determined that the Servicer was maximizing the recovery for the Mortgage Holder(s) by accepting new calculated principal amount through the Program, including taking into account the cost of legal fees and other costs incurred in the foreclosure process. In this case, the Servicer will not have to sell the foreclosed property at a significant discount thereby maximizing value for the Mortgage Holder(s). In fact, by significantly reducing the number of homes available for sale nationwide (die to those homes entering this Program), the overall economic picture will be greatly improved even for those Services on behalf of Mortgage Holders that eventually must foreclose. The Program contemplates splitting the Deferred Recapture Amount between the Homeowner. The Mortgage Holder and the Investor. If implemented, the Program could be modified to create the appropriate incentives necessary for full participation of necessary parties. Currently, the Homeowner’s share is determined based upon how much more than the “Base Monthly Payment Bid” the accepted Homeowner bid is. The “Base Monthly Payment Bid” is calculated based upon the FMV of the home. Note this is the only time the FMV of the home comes into play in any of the calculations.
After the amount of the Deferred Recapture Amount the Homeowner has “earned” by bidding higher than the Base Monthly Payment Bid is determined, currently, the remainder of the Deferred Recapture Amount is split equally between the Mortgage Holder and the Investor.
Since the Investor could receive a windfall profit over and above the stated interest rate through (i) participation in Deferred Recapture Amount and (ii) receiving a long term interest rate for a short term investment to the extent the Homeowner redeem the home from the Program period the due date of the Time-Out Mortgage, the Investor may be encouraged to accept a slightly lower interest rate than the investor would otherwise require. This would be positive for the Program and allow more “modifications” since interest rate and calculated principal amount are inversely related.
Why would a Servicer accept a pay-off amount which is less than the existing balance of the current mortgage? If the Servicer believes that the Homeowner may default, especially in the situation where the home is heavily underwater (mortgage amount significantly greater than FMV of home), then accepting a small discount on the pay-off of the current mortgage may be a good financial decision. The process of proceeding against a Homeowner in default is lengthy and expensive. We have received information from a reliable source that there is at least one significant Servicer that is having financial issues due to the cost of pursuing legal recourse on defaulted mortgages. Additionally, if the Homeowner stays in the home, the Servicer will not have to maintain the Home, pay real estate taxes without being reimbursed.
I hope that those individuals who can make a difference at least consider new and creative alternatives, such as this that, can assist many homeowners who are currently experiencing financial difficulties to remain in their home.
Ira R. Hecht