How Homedebtors Could Avoid Foreclosure - IR's Post

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crucialtaunt_IHB

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<p>For starters, I would like to recall IrvineRenter's <a href="http://www.irvinehousingblog.com/2007/04/16/how-homedebtors-could-avoid-foreclosure/">excellent rant on April 16th</a> on the blog. In that post, IR, by means of ideas, offered a potential solution to the approaching foreclosure Tsunami. He wrote:</p>

<p>"As much as it pains me to write this, there is a short to medium term solution to the foreclosure problem: convert part of the mortgage to a <a onclick="javascript:urchinTracker ('/outbound/en.wikipedia.org');" href="http://en.wikipedia.org/wiki/Zero_coupon_bond">zero coupon bond</a>. For those of you not steeped in finance, a zero coupon bond is a bond which does not make periodic interest payments. Think of it a zero amortization loan. You don’t pay either the interest or the principal, and both accumulate for the life of the loan. The loan would be due upon the sale of the house.</p>

<p>Here is how it would work for our typical homedebtor: Assume our financial genius utilized 100% financing and took out a $500,000 interest-only mortgage with a 2% teaser rate that is due to adjust to 6%. Let’s further assume his real income (not what he reported on his liar loan) could support a $1,500 payment on a $250,000 conventional 30-year mortgage at 6%. The bank could convert $250,000 to a conventional mortgage, and convert the other $250,000 to a zero coupon bond at 6% due on sale. The homedebtor can now make their payment, and they get to keep their house. But here is the catch: when they sell their house, they will owe the bank a lot of money. If they sell the house in 20 years, they will owe $800,000 on the zero coupon bond note. <em>In other words, all the equity gain on the value of the home will go to the bank."</em></p>

<p>Interestingly, someone else must have caught wind of this idea (or something like it). If enough of us try to do something to popularize this idea, maybe the marketing gurus at some of the largest lenders in the country might come up with a free market solution to these impending woes. One would hope and be optimistic for a <a href="http://en.wikipedia.org/wiki/100th_Monkey">"Hundredth Monkey Effect"</a> in this regard that would reach critical mass and cause the mainstream market to embrace this (or a version of this) idea to help solve the problem. (The <strong>"Hundredth Monkey Effect"</strong> is a supposed phenomenon in which a learned behaviour spread instantaneously from one group of monkeys to all related monkeys once a critical number was reached. I am not implying as a subtext that all mortgage issuers are monkeys:-)</p>

<p>I saw a glimmer of hope today with this post on SeekingAlpha: <a href="http://usmarket.seekingalpha.com/article/35834">The Next Home Equity Surge</a>:</p>

<p>"REX & Co, backed by a subsidiary of American International Group, Inc. (<a title="More opinion and analysis of AIG" href="http://seekingalpha.com/by/symbol/aig">AIG</a>), has a new product that lets homeowners tap the value of their homes without taking out a loan. </p>

<p>The novel product gives homeowners cash for their equity in return for a portion of the proceeds from the eventual sale of the home. For instance, a homeowner who has a $500,000 home can extract $100,000 of that by giving REX 50% of the change in the home value. So, if the home is sold in five years for $750,000, REX receives half the increase, or, $125,000. If it sells for $600,000, they receive $50,000."</p>

<p>While the stated goal of this product is dubious, as earlier in the post they say:</p>

<p>"Just when you thought consumer home equity induced spending was dead due to a slowing market and tightened credit standards, a new product promises to put some juice into it."</p>

<p>...It can still be tailored to meet the prototype of the product that IR had proposed a month ago.</p>

<p>What does the community think?</p>
 
<em>"When faced with the prospect of more than a million foreclosures, some Wall Street genius (I am being facetious) is going to come up with a solution very similar to what I just presented."</em>





I had hoped I was wrong.
 
<p>cru & IR,</p>

<p>I am glad you brought this up this subject as it is familiar to me.</p>

<p>The product is called "equity sharing". For those who wants to purchase and live in a $1.2 home with the payment of a $600K home, 0% financing. This is it. I have seen a number of home purchases this way already. I am keeping my eyes wide open.</p>

<p>Oh boy, here comes again: price runs up, fraudsters come in the market, .... The world is full of possibilities!</p>

<p>Wall street must have more money than they know what to do with. And I am not puffing.</p>

<p> </p>
 
<p>"So, if the home is sold in five years for $750,000, REX receives half the increase, or, $125,000"</p>

<p>What if the home is sold in 5 years for less than $500,000. Will REX take half of the loss ?</p>
 
<p>gn,</p>

<p>That is what it looks like. I will try to get a hold of the loan doc/contract to be 100% sure.</p>

<p>Mortgage Investors must have too much of a confidence in real estate bet.</p>
 
<p>gn, if you read the entire linked article from SeekingAlpha, you will find some semblance of an answer to your question...</p>

<p>"homeowners will have to commit to hold the home for a set number of years or face "early exit" fees of 5% to 25%."</p>
 
<p>nirvinerealtor: Don't get too cocky now . We are talking here about the bottom feeders in the RE game, i.e. the FB who bought in late using toxic mortgages and are now facing foreclosure. Since in your world there is eternal sunshine and you have a spotless mind (don't blame you, the NAR wants you to be that way), you may think this is yet another sign that the bottom has been reached fo rthe market as a whole. I think this is just a possible lifeline to those who may be about to lose their home, which they thought was their most important asset.</p>

<p>By using solutions such as these, they may be able to keep a roof over their heads, but at what cost? The cost they will pay is akin to slavery or bonded labor (see what <a href="http://en.wikipedia.org/wiki/Debt_bondage">peonage</a> means on wikipedia), i.e. they will be subjected to work and stay in the same place regardless of job prospects because they will be chained down by the follies of their dreams of "owning" a house.</p>
 
<p>cru,</p>

<p>I wish everyone can just forget that I am a realtor. I thought of using a non-realtor name for this blog but that would not work because I talk like a realtor! That being said, I think I am being fairly treated here because I am a realtor. As realtors can not be trusted as the general consensus.</p>

<p>I wish it is that simple that I can treat the market as a whole. This is OC. And the market is varied vastly from city to city.</p>

<p>I am just a market observer like everyone else. I am just sharing what I see as an industry insider.</p>

<p><strong>True story:</strong></p>

<p><strong>This young woman in her mid 20's just closed escrow on a $1.1M beautiful home in Irvine, 6 bedrooms, 4 baths, 3-car garage, 10,000 sq. ft. lot in a great neighborhood. It was a 100% financing loan for her. Her payment will be $4,000/month total, fix for 30 years. Yes, I think she will be stuck in this beautiful house for a long time because of the equity sharing. </strong></p>

<p><strong>Disclaimer: I am not promoting equity sharing in anyway because I do not have a full understanding yet. And I was not this woman's agent.</strong></p>

<p><strong>This home has a market rent of $4,500/month. This young woman plans to lease out 4 rooms for $900 each to her buddies. If this young woman skips paying taxes on her rental income, her housing cost is $400/month; assuming full rent all time.</strong></p>

<p>When I see financing options such this available, I see affordable housing, therefore, possible price run up. Does anyone have different take to my rosy projection?</p>
 
NIR.... being a single, well paid individual, like myself...I would never want to have to rent out 4 rooms to friends or strangers just so I can make my monthly mortgage, no matter how nice the house is. Now I know she probably loves the granite counter tops, stainless steel appliances, travertine flooring...etc but this girl is a classic case of an FB, IMHO. She has purchased a property that is way above her means.





Also, if she forecloses or wants to move in 5 yrs she pays huge penalty fees to the lender that made this type of loan. On top of that don't RE agents preach appreciation and not to sacrifice it, isn't this kind of financing doing just the opposite?
 
nir - Let me see if I have this true story correct. The buyer is getting a mortgage of $1.1 mil at a fixed rate for thirty years and the payment, total, is $4,000 per month? Are you sure of this?
 
<p>nirvinerealtor: <em>"Her payment will be $4,000/month total, fix for 30 years"</em></p>

<p>That's a great come on! Does that include taxes, mello roos, association etc.? I wanna buy (rent) one too! Seriously though, could you share some details on interest rates and other features such as prepayment penalty etc. on this 30-yr I/O? What are the details of "equity sharing"?</p>
 
<p>"If this young woman skips paying taxes on her rental income...."</p>

<p>Hello! If this woman skips paying taxes on the rental income, she may have to move from one big house to another - the second one being not so pleasant.</p>
 
<p>ELS,</p>

<p>I highly doubt this woman will skip paying taxes as accounting is handled through a trust and CPA's.</p>

<p>By no mean I am not promoting or endorsing this product so I do not want to publish the Equity Share Providers here (just being skeptic). Perhaps someone like IR or Graphrix can comment on this.</p>

<p>awgee & cru,</p>

<p>I am was told by the Equity Share Provider that $4,000/month includes everything (tax, HOAs,insurance...). There is no grace period for holding. You will split the profit/loss when you decide to sell. Your FICO must be at least 700 so it's a prime loan. No downpayment or closing cost required.</p>

<p>Like I said, I am still watching this program as I have seen many home sold this way. I am skeptical; however, it's seems like an affordable solution for housing.</p>

<p> </p>
 
So, if the short to medium term solution is these zero-am type loans, how would that play out on a large scale. . . What I mean is, if the bank's potential upside is to own the equity appreciation, is that really feasible?





I read an article in the paper that gave the statistic that OC home prices are 2.3 times the median (not sure if that was the median for the nation or for just the rest of California). It went on to talk about how lenders are essentially enablers of this form of "cultural pathology" because people fundamentally should not be able to afford that "much" house.





So, the thing I'm thinking about is that if these stretchy loans are going to be wiped away (by legislation, self-regulation), and if those are the loans that cause these types of values, what "equity appreciation" could there really be down the line? Do the banks really have a potential upside?
 
<p>nir - Thanks for the info. I was not so interested in the equity sharing aspect, just the loan. On $1.1mil, fixed rate, 30 year loan, what do you think the interest rate might be? The property taxes alone are $1,100 per month, and the payment on a $1.1 mil 30 year loan with 0% interest is $3,055, so even without interest, HOAs, insurance, the payment is $4,155, (that's more than $4000). </p>

<p>So, let me ask again, are you sure, "<strong>Her payment will be $4,000/month total, fix for 30 years</strong>."?</p>
 
<p>The manual on Equity Sharing appears to be written by a San Francisco-based attorney named Andy Sirkin.</p>

<p>The link is here:</p>

<p><a href="http://www.andysirkin.com/andysirkin/Resource/esm.pdf">http://www.andysirkin.com/andysirkin/Resource/esm.pdf</a></p>

<p>Interesting reading...</p>

<p>Grossly misleading...</p>
 
<p>awgee,</p>

<p>The total payment for this $1.1M home is $8,000. The owner is a co-tenant, spliting all costs 1/2. Since the borrower is a prime borrower, I am guessing 80% first is at 6.6% 30 fix I/O, and the 20% second is 8.5% fully amortized. Tax = $1,100, Insurance $100, HOA = $30.</p>

<p>I think I know what is going one here. I suspect not much risk for the buyer though, except when sell at a loss; which is for everyone. Hmm! Strange world we live in.</p>
 
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