Any doubts that we are in a full-blown mortgage crisis have
disappeared. Along with the growing certainty that the
problem is substantial and virulent, a variety of plans
attempting to find solutions is proliferating. Some of
these plans have or will fail because they help too few in
need or simply delay the reckoning day to a few years in
the future when we will have to face the issues again.
Others will face sure difficulties as they lay all of the
blame and ultimate risk on only one party, either the
borrower or the lender. Many rely on the Federal
Government to provide the "bail out", in other words,
taxpayers' dollars to fund poor credit decisions.
There are a series of goals that need to be met for any
plan to be successful. Some are shared by a number of
interested parties. Simply stated, these goals are:
Elimination or reduction of foreclosures; Elimination of
write downs and short sales, Promulgation of realistic
refinancing options; and Stabilization of real estate
values. If these goals are met, the logical conclusion
would be that we would have been successful in solving the
mortgage crisis in the United States. There is, in fact, a
long term solution that is available that avoids all of the
pitfalls enumerated in the first paragraph. This solution
is named the "Appreciating America Plan". Before
describing this plan, it is helpful to review some of the
current plans and their shortcomings:
- Hope Now Alliance ' This is the voluntary program in
which loan servicers attempt to modify loans for borrowers
who are currently in default or have a reasonable
likelihood to be so in the near future. The plan has been
touted because under it servicers modified approximately
one million loans. However, 75% of these "modifications"
were simply payment plans for the borrowers to try to repay
amounts that were overdue even though they could not
afford to pay these amounts when they were due a few months
ago. The remaining 25% of the borrowers saw their interest
rates frozen as low as 5% for three to five years. At that
time, the loans will convert back to their previous
"unaffordable" terms. Not much of a solution.
- Dodd/Frank/HUD proposals ' These proposed plans envision
refinancing the current adjustable rate mortgages with FHA
fixed rate loans at approx. 80% of the current value of the
home. While there is a notion that the FHA and the
borrowers will split some of the appreciation in the
future, the current servicers of the mortgages are required
to immediately write down any unpaid balances. Why
servicers of the 1st mortgages would agree to write off a
large portion of their debt without any chance of future
recovery is questionable, the idea that servicers holding
second mortgages would voluntarily write off the entire
second mortgage to aid the first mortgage holder is
nonsensical. There must be some recognition that there
must be a possible recovery in the future in consideration
of the current reduction of the mortgage.
- Authorizing Bankruptcy Courts to Write Off Mortgage Debt
' This is a tremendously dangerous idea to allow courts to
re-write contract terms and, effectively, write down loans.
All mortgages will become much more expensive given the
uncertainly the owners of future loans will have. No
longer will the mortgage contract control the transaction.
Courts will be the arbiter of each mortgage. Beyond these
issues, the constitutional concerns are real.
This brings us to the Appreciating America Plan. It is a
plan that should be adopted by all of the servicers,
promoted to all of the ailing homeowners and supported by
the US Government, especially the Federal Housing
Administration. FHA has told me that the use of this
solution would fit exactly within the current FHA
guidelines. It is a fairly simple plan which can be
utilized immediately in that it utilizes time-tested
mortgage programs used in the commercial arena generally
described as shared appreciation mortgages. I believe that
this is what Chairman of the Federal Reserve, Ben Bernanke,
was suggesting recently when he stated: "The fact that
many troubled borrowers have little or no equity suggests
that greater use of principal write downs or short payoffs,
perhaps with shared appreciation features, would be in the
best interest of both the borrowers and lenders." I
couldn't agree more.
Appreciating America works as follows:
- Homeowner refinances outstanding mortgages with an
approved "Appreciating America Lender" in accordance with
established FHA guidelines regarding loan to value ("LTV")
and debt to income ratios ("DTI"). The loan is fully
supported by sufficient income, LTV limitations, and tied
to past mortgage payment history.
- The Appreciating America Second mortgage is held by the
current mortgage servicer and defers payments and interest.
The homeowner and lender will share in the future
appreciation of the home to pay off the Appreciating
America second mortgage within five years.
- The new Appreciating America Second Mortgage is a
subordinated second shared appreciation mortgage equal to
the difference between the new FHA Mortgage and the
existing mortgage(s). This second shared appreciation
mortgage will accrue interest at 6%, with payments
deferred, and will not be payable until 5 years after the
loan is made (or the home is sold). At that time, the
homeowner has a choice of refinancing the mortgage(s) or
selling the home.
- To the extent that the value of the home at that point is
greater than the FHA 1st mortgage amount ' the homeowner
will first receive an amount equal to all capital
improvements made to the property since the Appreciating
America Mortgage closed, then the homeowner will receive
30% of the appreciation and the second mortgage holder will
receive the lesser of 70% of the appreciation or the
principal and accrued interest on the Appreciating America
Second Mortgage. All appreciation in excess of the second
mortgage balance including accrued interest shall belong to
the homeowner.
The benefits of the Appreciating America plan are
significant. Families will remain in their homes. With
the promise of shared appreciation and protection of
capital expenditures, the homeowner will be incentivized to
maintain and improve the property. The existing
lender/servicer will not to incur large losses in
foreclosing or agreeing to a short sale in a dropping
market. In fact, the servicer will receive the entire
available proceeds from the new FHA mortgage as repayment
on their original loan and may realize the remaining
balance through future appreciation. Property values
throughout the US should stabilize. Together, these
benefits should have a palpable positive impact on the US
economy while protecting from further property value
erosion. At my company, Refinance.com, we are implementing
the plan now.
An example of this transaction is as follows:
- Original Mortgage(s) $200,000 - Current Property value =
$180,000
- Homeowner qualifies for a new $153,000 FHA first mortgage
(up to 85% LTV, to include closing costs and FHA insurance
premiums), with existing servicer taking a $47,000 (plus
amount of closing costs and FHA insurance premium) shared
appreciation Appreciating America second mortgage.
- Current Mortgage holder(s) get immediate return of
$153,000
- Balance of $25,400 that servicer is owed becomes a shared
appreciation Appreciating America loan, secured by the
property but with no payments due. Interest would accrue at
a reasonable rate (6%)
- Property appreciates 3% per year over the next 5 years
and is appraised at $209,000. Homeowner will qualify for a
new FHA mortgage of approx. $203,000. The appreciation of
$56,000 would be split as follows: homeowner: $16,800 and
second mortgage holder: $39,200. The remaining principal
balance owed on the second mortgage plus any accrued
interest would be forgiven at that time
The time is growing short and we need to act fast. The
Office of Thrift Supervision suggested a variation of this
but included a new, untested feature that will absorb
precious time in rolling out. Appreciating America works
and works well. Debate is a great thing but not when it
comes at the expense of millions of homeowners. Let's not
talk about bail outs until we provide bootstraps and
solutions.
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Nicholas Bratsafolis is Chariman and CEO of Refinance.com.
Refinance.com is one of the country's largest home mortgage
lenders, in business for nearly 20 years. More information
about Refinance.com may be found at
http://www.refinance.com .
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