HAPN TM s: An Effective Tool for Today’s Mortgage Markets
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Transcript of HAPN TM s: An Effective Tool for Today’s Mortgage Markets
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HAPNTMs: An Effective Tool for Today’s Mortgage Markets
Presented to:Nebraska Investment Finance Authority
2010 Housing Innovation Marketplace
by IFE Group
January 26, 2010
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Agenda
Current Challenges HAPNTM as a Solution Example: HAPNTM as Origination Tool Example: HAPNTM as Workout Tool
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Major Challenges in Today’s Mortgage Markets New Originations - Mortgage credit is still hard to obtain,
especially for low/moderate income borrowers, and other than the strongest borrowers
Troubled loans - Millions of homeowners have negative equity in their home and/or a mortgage they can no longer afford as house prices and incomes have fallen in jeopardy of default and losing their home Troubled borrowers have few resources/alternatives to contribute
to working out their troubled loans Lenders have the difficult choice of:
Restructuring the loans at great expense, with significant risk of re-default Foreclosing on the loans Selling the loans at a very low price, absorbing large accounting and economic
losses
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HAPNTM as a Solution Homeowner capitalizes future capital gain in
housing, applying it to loan UPB, resulting in: Low LTV, affordable mortgage Future house price risk shifted to investors more capable
of bearing it Low probability of default/re-default
NPL owner now has additional resources with which to restructure loan Market value (or spread) of transforming a nonperforming
loan into a performing loan Value obtained from the HAPNTM
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What are HAPNTMs? Characteristics of HAPNTMs (Home Appreciation
Participation Notes – patent pending) A zero coupon bond as a 2nd lien on the house 10-year maturity due on change of ownership Payoff is computed by share of difference between initial
and final automated appraised house value All negative HPA borne by HAPNTM investor
Require homeowner to retain no less than 10% of HPA
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Example: HAPNTM as Origination Tool
With HAPNTM:
$137K: mortgage
$ 10K: downpay
+) $ 53K: HAPNTM
$200K: House
Traditional:
$160K: 1st mrtg
$ 30K: 2nd mrtg
$ 10K: downpay
$200K: House
Annual FRM 30 payment = $14,191 ($160K at 5.5% + $30K at 10%)Income requirement = $43,000 (33% PTI ratio)
Annual FRM 30 payment = $9,427 ($137K at 5.5%)Income requirement = $28,564 (33% PTI ratio)
INCOME REQUIREMENT REDUCED BY 34%
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Result of Using HAPNTM as Origination Tool
Borrower able to obtain a more affordable mortgage Lower LTV loan lower probability of default Borrower protected against declines in house prices
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Example: HAPNTM as Workout ToolNPL: UPB = $250K House price = $200K Household income = $30K Mortgage rate = 7% Payment = $20K/yr LTV = 125%, PTI = 68% Exp. Loss = $125K (50% of UPB)
Refinance by HAPNTM:
$147K: 1st Mortgage
+) $ 53K: HAPNTM
$200K: House
Reduce payment to affordable level, e.g., 33% of income: $10K With 30-year FRM at 5.5% interest rate: UPB = $147K, i.e., 72% LTV
HAPNTM is the $53K residual →implies 78% share of appreciation Required payoff in 5 years to earn 8% return = 53 x (1.08)5 = 78 Expected house appreciation in 5 years at 3% HPA = 200 x (1.03)5 - 200 = 32 HAPNTM share of appreciation = (78 – 53) / 32 = 78%
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Result of Using HAPNTM as Workout Tool Homeowner stays in home NPL owner has written off $50k rather than losing
$125k that would result from foreclosure A new, low risk mortgage
Low LTV Low Payment to Income ratio Borrower still has significant stake (equity) in the home
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