"Appreciating America" - a Market Solution to the Mortgage and Housing Crisis

By: Nicholas Bratsafolis

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 short sales and write downs, 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 homeowners 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 first mortgages would agree to write off a large portion of their debt without any chance of future recovery is in doubt, the idea that servicers holding second mortgages would voluntarily write off the entire second mortgage to aid the first mortgage holder is rediculous. 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 positive impact on the US economy while protecting from additional 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 home value increase of $56,000 would be split in this manner: 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" is a plan which 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.

Article Source: http://www.dxarticle.com

Refinance.com Chairman and CEO Nicholas Bratsafolis is a frequent speaker on the topic of mortgages and refinancing. Learn more about Refinance.com at www.refinance.com .

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