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HAPN TM s: An Effective Tool for Today’s Mortgage Markets

HAPN TM s: An Effective Tool for Today’s Mortgage Markets. Presented to: Nebraska Investment Finance Authority 2010 Housing Innovation Marketplace by IFE Group January 26, 2010. Agenda. Current Challenges HAPN TM as a Solution Example: HAPN TM as Origination Tool

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HAPN TM s: An Effective Tool for Today’s Mortgage Markets

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  1. 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

  2. Agenda • Current Challenges • HAPNTM as a Solution • Example: HAPNTM as Origination Tool • Example: HAPNTM as Workout Tool Page 1

  3. 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 Page 2

  4. 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 Page 3

  5. 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 Page 4

  6. 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 = $9,427 ($137K at 5.5%) Income requirement = $28,564 (33% PTI ratio) Annual FRM 30 payment = $14,191 ($160K at 5.5% + $30K at 10%) Income requirement = $43,000 (33% PTI ratio) • INCOME REQUIREMENT REDUCED BY 34% Page 5

  7. 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 Page 6

  8. Example: HAPNTM as Workout Tool • 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% • NPL: • 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 Page 7

  9. 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 Page 8

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