Home Valuation Solution
This overview will offer an outline of a practical solution
for addressing all of the current distressed and negative equity homes
throughout the United States. The
goal of the program is to have homeowners take on a realistic proportion of
their negative equity position by restructuring to affordable payments, while
building a savings program that will help accelerate their principal reduction.
In addition, this program will result in a market-supported level of homeowner
debt in the shortest possible time with the least amount of loss to the
mortgage note holder and least amount of negative credit impact to the
homeowner. The even greater
societal good of this program is that, if widely used, could serve to stabilize
home values nationwide.
Quick stats
- Over 10,000,000 or 20% of all homes with mortgages in the United States have a value that is less than what is owed on the property.
- Total exposure to potential losses for banks could exceed $1.5 trillion.
- The average home that is overleveraged has a mortgage of $220,000 but has a value of $170,000.
- The average home that has a 1st and a 2nd mortgage with a value of $225,000 but has mortgage obligations totaling $309,000.
- There are over 5,500,000 homes that are in some stage of delinquency or foreclosure.
Below is an example of a home that represents the average
property in the US that is underwater
(they owe more than the home is worth) with only a 1st
mortgage.
Current payment: $1,403.19 at 6.5%, based on a $220,000 loan
New
program based on Owner Occupied (mortgage only lien)
|
Payment
Schedule
|
|
|
|
|
|
|
|
|
Year
|
Graduated Interest rate.
What the borrower actually pays
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Borrower set at 1% Bank Note =Principal and Interest
|
Actual Monthly Payment Principle
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Owes
|
Value
|
Annual Principal Savings Account
|
Annual payment savings
|
|
1
|
1.50%
|
$707.61
|
$759.26
|
$213,679
|
$175,100
|
$619.80
|
$7,727.16
|
|
2
|
1.50%
|
$707.61
|
$759.26
|
$207,296
|
$180,353
|
$1,239.60
|
$7,727.16
|
|
3
|
2.00%
|
$707.61
|
$806.24
|
$200,848
|
$185,764
|
$2,423.16
|
$7,163.40
|
|
4
|
2.50%
|
$707.61
|
$853.10
|
$194,336
|
$191,336
|
$4,169.04
|
$6,601.08
|
|
5
|
3.25%
|
$707.61
|
$901.73
|
$187,757
|
$197,077
|
$6,498.48
|
$6,017.52
|
|
6
|
4.00%
|
$707.61
|
$968.92
|
$181,113
|
$202,989
|
$9,634.20
|
$5,211.24
|
|
7
|
4.00%
|
$707.61
|
$968.92
|
$174,402
|
$209,079
|
$12,769.92
|
$5,211.24
|
|
Regular Mortgage for remaining 22 year amortization
|
5.0%
|
$0.00
|
$1,152.34
|
$161,632
|
$209,079
|
|
|
|
Total consumer monthly savings
|
|
|
|
|
|
|
$45,658.80
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The objective of this project is to remove all of the
distressed properties (even if the homeowner is current with payments) out of
their current mortgages (including 2nds), and replace them within a loan
program that will:
- For the homeowner
- Reduce payments dramatically – in some cases their payments will be reduced by over half of what they are paying in principal and interest.
- Payments are calculated on a basis of debt to income ratios, home value to debt, and the number of liens.
- Create a buy-in so that the homeowner knows that they will be leaving something valuable on the table if they walk away from the home.
- The Annual Principal Savings Account is dollars that accumulates from the difference between the graduated mortgage interest rate that the homeowner pays, and the fixed 1% interest rate that the bank actually charges.
- By removing all of the distressed homes out of the U.S. marketplace, there would be a very strong propensity of the housing market to solidify. Thus home values outside the programs inventory will start to move upwards.
- This program will be giving annual reports to the homeowner regarding market valuation increases.
- The amount in which each property will go up depends highly on the economic conditions.
- Credit rebuilding – The homeowner will be saving a substantial amount on a monthly basis. Theses funds should be used to pay down debts, make necessary home repairs, reinstate healthcare insurance, and increase savings into retirement and educational accounts.
- The proposed program will provide an initial snapshot of how their credit report looks like at the initiation of the program, and then a year-to-year comparison on how the homeowner is performing.
- If life circumstances happen and homeowners are forced to move.
- If the homeowner wishes to leave prior to the end of the program, the payments are assumable for both owner occupied and investors.
- Providing that the current homeowner contacts the servicing bank and makes payments, the program will list the home at the payment rate (the home can be overleveraged, but the affordability of owning a particular home at a payment and a down payment that is less than buying a home outside the program will keep this inventory very attractive. If the homeowner tends to the property, and the home is appropriately maintained, then the original homeowner is entitled to 50% of the Annual Savings Account. Part of the down payment for the new homeowner goes directly into the Annual Savings Account.
- For the banks
- Financial institutions would put all of their distressed and toxic properties through the program to determine how the loans should optimally be restructured.
- Each concerned property will have a different future performance matrix that it will need to obtain in order to reach of healthy level of value in relation to its outstanding loan(s).
- In some cases there may be some principal forgiveness, but only to the point in which the home will qualify to succeed through the duration of the program.
- Each homeowner will have a varying ability to pay for the loan. Thus if a homeowner that is current and has a low debt to income ratio, their graduated payment could be more aggressive making their home eligible for a regular refinance out of the program in a quicker timeframe.
- Part of the calculation to determine future value relies on the forecast of economic soundness for the area. Some areas will have a low appreciation level of 1% whereas thriving communities may reach an annual rise of 7%.
- This program will hypothesize at origination of how much the home value will increae using economic modeling.
- Banks should act as a holding company for all of these loans.
- By removing the loans from their balance sheets, the banks will regain liquidity.
- Public trust would then be regained over time in the financial industry. Thus it may be safe to assume that the value of their stocks would reflect their newfound soundness (barring no future financial disaster).
- Banks would have all loans on their books at 1% amortized over 30 years.
- Money would be borrowed from the Federal Government at .75%.
- Each loan is designed not to exceed the 7-year term.
- At the end of the program the banks will refinance all mortgages to a 22 year predetermined fixed rate.
- When two liens are on a property and two banks are involved, at the end of the program the lender with the 1st mortgage will be the default bank to perform the refinance.
- Banks will service all loans
- The .25 spread is provided cover the cost of servicing and payment of an oversight company that will monitor bank performance, monitor values and pull credit reports on behalf of the homeowner.
- For the mortgage backed
securities and bond holders
- There needs to be an agreement that the bond holders will be made whole on the majority of the distressed properties, but the adjustment necessary to bring the property to a level to succeed, will require some principal reductions.
- If the property has a 1st mortgage and a 2nd mortgage, then any adjustment to principal will be shared equally as a percentage to the amount being reduced.
- We assume that all of these securities have had a stress test on all of their properties within their portfolio. Thus if they have already done a write-down on the full amount of the potential loss, then under this program the security will take an actual loss that is substantially less.
- For the Federal Government
- The cost of funding this program is at least $3.75 trillion dollars
- All dollars lent would be based on a 7-year adjustable rate mortgage, amortized at 30 years.
- Funds would be borrowed at 0.75%.
- Before the program ends, the banks will have paid back $460 billion to principal through amortized payments (based on $3.75 trillion borrowed).
- At the end of the program, the banks will be responsible for paying back the remaining obligation.
- The Federal Government will be awarded stock options from all participating banks.
- Stock options can be exercised from year 4 to year 10.
- By removing all toxic assets from the marketplace the economy should adjust positively.
- Home sale transactions on existing healthy real estate will start to show a reasonable increase.
- New home starts increase.
- Being the first county out of the recession, our GDP should show respectable growth.
- Bankruptcies should decrease.
- The savings in payments for all of the homeowners throughout the duration of the program will be more than $4.5 trillion.
- The multiplier effect for our economy could be very substantial.
- Unemployment will lower.
- An increase in employment tax revenue, while reducing social service obligations.
- For the State Government
- Property tax revenue will go up due to increased valuations.
- Using a 3% increase in value nationally, these homes within the program will bring in an additional $1.5 billion in tax revenue.
- For the American population
- A healthy housing market stabilizes the economy.
- Valuation in retirement accounts should be reflective based on the health of the economy.
- More opportunities for new jobs.
- Current homeowners will have an increased valuation for their home.
- At the end of the program, each bank must pay all dollars that are still outstanding back to the Federal Government.
- An third party oversight group will ensure that the banks are managing their portfolio of new loans appropriately, and that all funds that are to be paid to the Federal Government on a monthly basis is accurate and on time.
As complex as the inner workings of this program are, it is
the simplicity of the usage by banker that will make it easy for the majority
of homeowners to qualify, and be processed quickly. It is recognized that there will be a fair percentage of
cases that will not be streamlined through the initial programming, and that
further underwriting will be triggered.
A program for more complex situations will also be streamlined, but will
require qualified underwriters to oversee the process.
I recognize that the burst of the housing bubble was a
perfect storm, and that it has forced good people to make devastating financial
decisions that they may never have thought they would have in the past. The following have become cultural
norms, purposefully being late to spark the potential of a loan modification,
bankruptcy to avoid responsibilities on second lien mortgages, strategic
foreclosure due to banks inability to negotiate, or a homeowner recognizing
that their current situation will be detrimental to their long-term financial
goals.
This program gives a strong incentive to all participating
homeowners, and it is not designed to eliminate negative principal positions,
nor does it set up homeowners to stay in their homes for unreasonable periods
of time when the participant is unable or refuses to pay their obligation. The objective is to have responsible
homeowners pay their obligation though the duration of the program, and to
strengthen their financial position for the future.
Although there is a significant upfront cost to the tax
payers, and that the large dollars that I am suggesting to be obligated to this
program will give all tax payers initial stress, but I believe the benefits
demonstrated that the macroeconomic impact, along with the guarantee of full
principal payment in conjunction with a minimum interest rate return will
compel government action.
Thank you for your time and consideration and I look forward
to discuss this further at your earliest convenience.
David DeBois
homevaluecrisis@gmail.com
