Mr. Zandi (from Economics.com and sponsored by Moody's) compiled this report presenting a near duplicate of our De-LETO system. The difference is that our program provides more options, greater affordability and a broader application. However, this wonderful report presents all the same market advantages we claimed for De-LETO. We will be contacting them (economics.com) shortly to see if they would have any interest in looking over our program as a supplement to their their excellent proposal.
Here is the first of 4 part series by Mr. Zandi.
The Home Appreciation Mortgage Plan
is a sustainable, low-cost solution to
the nation’s housing crisis, by providing
quantifiable benefits to homeowners,
mortgage owners, and the government.
For the plan to be successful each of these
players must benefit financially compared
to the alternatives. The core of the HAM
plan is to modify individual mortgages in
such a way that it leads to a substantial
reduction in the debt burden for
homeowners while minimizing the losses
for mortgage owners and should result in
no net cost to taxpayers. The HAM plan
is expected to benefit an estimated 1.3
million hard-pressed homeowners, helping
to stabilize the housing market and thus
the broader economy and financial system.
The advantages of the HAM plan are:
Mortgage owners must writedown
their mortgages to 90% of the current
appraised value of the home. The HAM
plan is not a bailout of mortgage owners.
Mortgage owners maintain ownership
of the 1st mortgage and thus have
a strong incentive to only put
homeowners into the plan that they
believe will succeed in remaining
current on their new mortgage.
Mortgage owners share in the future
price appreciation of the home.
There is an incentive for 2nd lien holders
to subordinate their interests and
allow loan modifications to occur. This
incentive results from their share in the
future price appreciation of the home.
Homeowners owe on a much smaller
mortgage, have a lower monthly
mortgage payment, and share in the
future price appreciation of their home.
The HAM plan is revenue neutral for
the federal government under
nearly all scenarios.
Broadly, the key components of the HAM
Mortgage owners modify the 1st and
2nd mortgages of non-investor
homeowners that are delinquent
and that they believe are at
significant risk of default.
The homeowner must be an owneroccupant,
have a debt-to-income ratio
of no less than 40%, and certify that
he/she has not intentionally defaulted
on their existing mortgages.
The modification consists of writing
down the original 1st mortgage into a
new smaller first mortgage and a nonamortizing
HAM 2nd mortgage loan.
An appraisal is conducted on the home.
The mortgage owner selects a new
combined LTV relative to the appraised
value of the home of up to 90%,
depending on how much of the
original mortgage they are willing to
write down. The original combined
mortgage balance is written down
to the new combined 90% LTV. The
combined LTV of the new 1st and new
HAM 2nd mortgage must be no greater
than 90%, with a 15% maximum LTV
on the HAM 2nd mortgage.
A new 1st mortgage is established.
This mortgage will be a 30-year fixed
rate loan at prevailing mortgage rates.
A new 2nd HAM mortgage with
a FHA principal guarantee is
established. The original 1st mortgage
owner is the owner of both the new
1st mortgage and the new 2nd HAM.
The FHA guarantee applies only
to the HAM 2nd mortgage, up to a
maximum 15% LTV. This limits the
government’s future credit risk while
better aligning the interests of mortgage
owner. To make the HAM plan as
affordable to as many homeowners
as possible, the insurance premiums
paid to the FHA are paid at the sale or
refinancing of the home.
In cases where there is a 2nd
mortgage lien on the home, the
2nd mortgage owner is required
to subordinate to the new 1st
mortgage and HAM loans. The 2nd
mortgage owner participates in the
distribution of proceeds at the sale
or refinancing of the home.
Homeowners will be subject to a fee if
they sell or refinance within 3 years.
Upon termination of the mortgage
through (a) refi; (b) sale of home; or
(c) reaching the 10-year term (which
would require a refi), the proceeds
from sale (or value determined by
appraisal) are distributed as follows:
1. 3% of HAM guarantee to FHA
(e.g. $20,000 * .03 = $600).
2. 1st mortgage principal.
3. HAM principal.
4. 2 times the HAM LTV (e.g. 10%
HAM = 20% fee).
5. The original 1st and 2nd lien
mortgage owners and homeowner
share proceeds 1:1. The original
1st and 2nd lien mortgage owners
in turn divide their proceeds 60:40
between themselves until the
original principal balances have been
repaid in full. When one loan (1st
lien or 2nd lien) has been repaid
it is capped and the distribution
continues with the homeowner 1:1
until it too has been repaid in full.
6. Homeowner receives any
The terms of the HAM loan are as follows:
2nd lien mortgage available up
to 15% of the current appraised
value. The combined 1st and 2nd
mortgage LTV limit is 90%
HAM size calculated by formula:
1st + HAM <= 90%, with HAM
maximum of 15%.
Interest rate terms: 2% interest-only
Shared appreciation rate: applied at
the sale, refinancing, or refi value
when reaching the 10-year term after
principal of 1st and 2nd mortgages
have first been paid.
Principal is guaranteed by the FHA.
A secondary trading market of HAMs
allows owners to sell the HAM loans for
a discount or premium value
dependent on the market’s expectations
for home price appreciation.
Moody’s Economy.com • www.economy.com • email@example.com • Home Appreciation Mortgage Plan / April 2008 12
To see how the plan works, consider the following example:
A family purchases a home for $250,000 and finances it with a 30-year $200,000 8% 1st mortgage and a $25,000 8% piggyback 2nd
mortgage. The homeowner has become delinquent in his payments and the mortgage owner is considering foreclosure proceedings.
As an alternative to foreclosure, the lender chooses to modify into a new 1st and a HAM 2nd mortgage.
Step 1: An appraisal is conducted and the home is appraised at $200,000.
Step 2: The mortgage owner selects an 80% LTV 1st mortgage and a 10% HAM 2nd mortgage with a cumulative LTV of 90%. The
1st mortgage is for $160,000 and the HAM 2nd mortgage is for $20,000.
Step 3: The new 1st mortgage of $160,000 is a 30-year fixed rate loan at the current prevailing rate.
Step 4: The new FHA principal-guaranteed, interest-only HAM 2nd loan of $20,000 has terms of 2% interest per year plus a share
appreciation fee upon termination of mortgage (2*HAM LTV = 2 * 10% = 20%)
Now suppose the home is sold in 5 years for $238,000 assuming an average annual house price gain of approximately 3.5%. The
distribution of the proceeds from the sale is as follows:
1. FHA HAM Guarantee Payout(+)/Receipts(-) less $ 600
2. Remainder of 1st mortgage principal is repaid: less $ 152,112
3. 2nd mortgage HAM principal is repaid: less $ 20,000
4. 20% of appreciation is paid as fee to HAM less $ 13,058
4. Homeowner and original 1st & 2nd lien holder paid 1:1to the $45,000 level of short-sale writedown:
a. Homeowner: less $ 26,115
b. 1st Mortgage: less $ 13,058
c. Original 2nd Mortgage: less $ 13,058
5. No additional balance for homeowner.
Net Distributions at Termination:
A. Original 1st Lien
Revised 1st Mortgage Remaining Principal $152,112
Revised HAM 2nd Principal $20,000
Revised HAM 2nd AppreciatioN $13,058
Share of Distributions for Original Mortgage Writedown $13,058
Total Distributions of Original 1st Lien $198,277
B. Original 2nd Lien
2nd Mortgage Principal $13,058
C. Homeowner Equity $26,115
D. FHA Insurance Paid $600