1 / 17

Using Hardest Hit Funds as patient capital

Using Hardest Hit Funds as patient capital. to right-size borrowers’ payments and equity to their capacity to pay (An Example). In the past. 2007 Borrowers buy $200k home Put down 12.5% - $25k Borrow $150k 1 st mortgage $25k 2 nd mortgage 2007 Borrowers’ income $63k

ted
Download Presentation

Using Hardest Hit Funds as patient capital

An Image/Link below is provided (as is) to download presentation Download Policy: Content on the Website is provided to you AS IS for your information and personal use and may not be sold / licensed / shared on other websites without getting consent from its author. Content is provided to you AS IS for your information and personal use only. Download presentation by click this link. While downloading, if for some reason you are not able to download a presentation, the publisher may have deleted the file from their server. During download, if you can't get a presentation, the file might be deleted by the publisher.

E N D

Presentation Transcript

  1. Using Hardest Hit Fundsas patient capital to right-size borrowers’ payments and equity to their capacity to pay (An Example)

  2. In the past • 2007 Borrowers buy $200k home • Put down 12.5% - $25k • Borrow • $150k 1st mortgage • $25k 2nd mortgage • 2007 Borrowers’ income • $63k • Mortgage Debt to Income 28.8% • Total Debt to Income 44.3% • Borrower has capacity and incentive to make mortgage payments HHF Example

  3. In the past HHF Example

  4. In the present 48 months later • 2011 Borrowers’ home value down 30% to $140k home • 1st mortgage balance $141,922 • 2nd mortgage balance $20,350 • Combined Loan to Value 117% in a non-distressed sale • Investor loss approx ($23k - $65k*) • Borrowers’ economic incentive to pay and maintenance the house is gone * REO stigma value $98,000 on foreclosure sale HHF Example

  5. 48 months latercontinued • 2011 Borrowers’ income has been “down-sized” • Borrowers’ capacity to pay and maintenance the house is gone HHF Example

  6. Restructuring to sustainable payment load • Break current debt obligation into two parts • A new loan based on the borrower’s capacity to pay • Historically they performed when housing debt & total debt were 28/44% respectively • An equity sharing contract based on future property appreciations rights – hereafter “rights” • Difference between outstanding debt • Less the property’s current value • Less any principal reduction needed to achieve the sustainable payment level where total debt payments <= 44% of current pay HHF Example

  7. Sourcing Opportunities • Loans purchase for restructuring have these characteristics: • Borrowers self identify • Can pay (something) and want to stay • Are 90 days or less delinquent • Warehouse facility leveraged with Hardest Hit Funds acquires delinquent / underwater assets from banks at prices near book value. • Program is designed to clean up Investor balance sheets too. HHF Example

  8. Restructure Profile • With HHF “patient capital” Borrowers’ payments & equity ownership “right-sized to capacity to pay HHF Example

  9. Restructure Profile • With HHF “patient capital” Borrowers’ payments & equity ownership “right-sized to capacity to pay HHF Example

  10. Restructure Profile • With HHF “patient capital” Borrowers’ payments & equity ownership “right-sized to capacity to pay HHF Example

  11. The fix is in “baked in the cake” • We eliminate expensive installment debt and refocus these payments towards buying back the shared appreciation “Rights” HHF Example

  12. The fix is in “baked in the cake” • We eliminate expensive installment debt and refocus these payments towards buying back the shared appreciation “Rights” HHF Example

  13. The fix is in “baked in the cake” • We eliminate expensive installment debt and refocus these payments towards buying back the shared appreciation “Rights” HHF Example

  14. Required Borrower Behavior & Financing • With sustainable 1st mortgage debt • Pays down existing Installment debt • Once these debts are extinguished they use those cash flows to buy back Patient Capital Equity Appreciation Rights • Patient Capital & 1st mortgage financed @ 6% • 1st mortgage sold after 24 months to recycle HHFs $ HHF Example

  15. Pricing Scenario • Book Value bid for existing debt 165k • New 30 yr fix 1st at 6% • Property appreciates at 2% per annum • Borrower Pays off installment debt • Uses former installment debt cash to buy back Appreciation Rights • Refinances in at 80% LTV 6 years forward with $32k in equity HHF Example

  16. Pricing Scenario • Book Value bid for existing debt 165k • New 30 yr fix 1st at 6% • Property appreciates at 2% per annum • Borrower Pays off installment debt • Uses former installment debt cash to buy back Appreciation Rights • Refinances in at 80% LTV 6 years forward with $32k in equity HHF Example

  17. Summary • Rather the giving money away, the patient capital in “rights” earns a 6% return • Bank’s balance sheet is restored, loss reserves adjusted and taxed, bank gets back to making good loans • Consumer and neighborhood are spared foreclosure sigma costs which impact the value of all homes HHF Example

More Related