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HAPN TM s: An Effective Tool for Today’s Mortgage Markets Presented to: Nebraska Investment Finance Authority 2010 Housing Innovation Marketplace by IFE.

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Presentation on theme: "HAPN TM s: An Effective Tool for Today’s Mortgage Markets Presented to: Nebraska Investment Finance Authority 2010 Housing Innovation Marketplace by IFE."— Presentation transcript:

1 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

2 Agenda  Current Challenges  HAPN TM as a Solution  Example: HAPN TM as Origination Tool  Example: HAPN TM 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 HAPN TM 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 HAPN TM Page 3

5 What are HAPN TM s?  Characteristics of HAPN TM s (Home Appreciation Participation Notes – patent pending)  A zero coupon bond as a 2 nd 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 HAPN TM investor  Require homeowner to retain no less than 10% of HPA Page 4

6 Example: HAPN TM as Origination Tool With HAPN TM : $137K: mortgage $ 10K: downpay +) $ 53K: HAPN TM $200K: House Traditional: $160K: 1 st mrtg $ 30K: 2 nd mrtg $ 10K: downpay $200K: House Annual FRM 30 payment = $14,191 ($160K at 5.5% + $30K at 10%) Income requirement = $43,000 (33% PTI ratio) Annual FRM 30 payment = $9,427 ($137K at 5.5%) Income requirement = $28,564 (33% PTI ratio)  INCOME REQUIREMENT REDUCED BY 34% Page 5

7 Result of Using HAPN TM 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: HAPN TM as Workout Tool 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 HAPN TM : $147K: 1 st Mortgage +) $ 53K: HAPN TM $200K: House  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  HAPN TM 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) = 32  HAPN TM share of appreciation = (78 – 53) / 32 = 78% Page 7

9 Result of Using HAPN TM 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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