Looks like CUMA may finally roll out the RADHA Mortgage program
Hi Scott,
Thank you for your full and prompt response. You may find this letter offering the outline of the entire program for you to utilize.
As for selling the 1st Trust on the ‘Secondary Market,’ there are several significant advantages that need be highlighted in marketing it.
1) The first is the point you bring up about the rate of re-defaults of other loan modifications. RADHA’s 1st Trust Mortgage is unlike other loan modifications that were weighed down with all the disadvantages that RADHA will now correct:
a) The monthly payment reductions of most loan modification programs were negligible (sometimes they even costs more). In contrast, RADHA starts at a reduction of 30% and will generally run at 50% less (the original mortgage). Sometimes, RADHA will be even less than that.
b) Most loan modifications provided no equity value (whether they extended the loan from 30 years to 40 or even when they reduced interest for a few years). In contrast, RADHA provides equity or market parity in just 4 years. No other program does that except for those wherein the bank takes a much bigger hit and generally, that is only on foreclosed properties. RADHA’s equity offers a huge incentive to home owners to stay.
c) Another big difference is that people are happy to walk away from a liability as they are choosing to do more and more as this crisis continues - even when they can afford to pay. (This maybe true by as much as 30% of all foreclosures. I’ll confirm this, but believe this to be the case.) Homeowners feel stupid paying twice as much for something going for half the price down the street. However, people hate to leave money on the table. RADHA’s mortgage payments are less than the rental market (which is the center piece formula of the 1stTrust Loan). People will hate to leave that ‘deal’ to someone else. Right now, people can literally get the same property down the street for half the price. With RADHA, they will be leaving a property behind that cost less than the neighbor’s rental.
e) The final cherry on top maybe the one you suggested in our call before the meeting. Your idea was brilliant. You suggested that the loan modification itself be revamped as a foreclosure process with the right of first refusal (being offered to the homeowner as a second chance). This leaves RADHA as the fastest, easiest and friendliest foreclosure process on the market. In short, we are offering a short sale with far greater terms to the bank. This will greatly enhance the securities appeal to the secondary market while proving incredibly appealing to the banks with distressed properties.
These advantages will distinguish the RADHA 1st Trust mortgages as one of the hottest real estate securities on the market. Michael said as much which is why our follow up conversation concluded with him offering to package & market them.
The 2nd Trust is just as attractive. This maybe the easiest way to explain it:
Let’s take your example from our conference call. You said that the $200,000 mortgage may only fetch $90,000 on the (secondary market or from a real estate investor). I’m suggesting we sell this remaining loan for this same $90k.
In the 5th year, the property is refinanced for $130,000. The security investor takes 1st Position with their $90,000. The bank takes the 2nd position as the 2nd mortgage holder for $40,000. If the market has not improved by the 5th year, the bank will now write off the difference. However, should the market have stabilized by then, the bank will get this extra $40,000. (Bank also wrote-off the additional $40,000 or 20%.
Example:
$30,000 = 1st Term Trust: Sold & paid by homeowner in 1st Term.
$90,000 = 2nd Term Trust sold to Secondary market.
$110,000 = Total Sold to Secondary Market in 1st Term.
$40,000 = Write off by bank;
$40,000 = Refinanced in 2nd Term as 2nd Mortgage (Position).
$80,000 = total mortgage carried & written down by original mortgage provider.
$200,000 = Grand total.
(We may have to sell the $90,000 for $80,000 so they can charge 4% to 5% interest rate on it.)
In summary, today’s market (in your example) requires the bank to write down 55% to sell their distress property. There still remains the additional cost of foreclosure (which runs between $10,000 to $40,000 leaving them with just $50k to $80k). This can often take months (4 to 8). A growing number of banks are accepting this given their capital stress or interest to clean up their books.
RADHA is the exact opposite. The RADHA Loan can provide them with a down payment of 55% today (10% more than today’s price) followed with the possibility of collecting an additional 20% in 4 years from now. The cost can be as low as say $5,000 (to close) and can be done w/in 30 days. In short, the bank gets 75% (over 4 years) using RADHA rather than just 45% the price (or 25% after costs) offered by today’s market and it gets it upto 80% faster.
Even more appealing to the banks is that the RADHA Loan is a ‘Good Cop’ foreclosure program providing a far more cost effective and very fast process then either the ‘short sale’ or today’s standard foreclosure procedures. We would market the RADHA program as a (nearly) pain free, foreclosure program. This would be an easy sell to banks, security investors & homeowners alike. This will provide a lot of incentives for banks (credit unions) to take that ‘extra step’ of our process for it is nothing more than the foreclosure process at a 5th the costs & time.
As for your concern about the ‘extra’ time and effort, well, all that extra time becomes a plus if you are making a 30% to 80% profit for this additional service. We simply need to figure how much to charge so it’s worth your time.
The 3% to 6% cost charge for your service (per loan) was in reference to a $200,000 mortgage meaning it would be $12,000 to restructure it or $24,000 to foreclose should the homeowner again redefault. If the homeowner did not foreclosure, then the remaining 3% would be returned to the bank. If that price is too high, we can go with 2% to 4% ($8,000 to $16,000). Or we can simply charge a flat fee with a retainer for the default.
I’m very happy with the conference call. These issues have been raised by other Wall Street players and so familiar with them. They are already outlined in the book I wrote about the RADHA Loan program. What made this conference special is the opportunity to discuss those points with you & Carlos.
This now leaves us with the question of whether we can actually get enough of these 1st Trust Mortgages for Michael to package. How many do you think we can gather from the Credit Unions and how long will it take to get them? Once he has begun to do this, we can introduce the concept to sell the 2nd Term Trust as well.
As for the role and participation of the CU, I would simply extend the patent of the program to include the process you are offering in processing the loans (such as the spread sheet template developed for processing the loan, the manual of details on the policies & regulations employed for restructuring, etc) In this way, CU would get a bonus for utilizing your process upon RADHA getting a contract w/ a large bank. We would find another service provider at that point or leave the bank to do it in-house. And yes, you are not providing the financing though you may offer the referral to investor services that will finance such programs as Michael is proposing.
Thank you again for your time and support. I’m especially encouraged by your kind offer of consultancy service to others we bring to the table. Hope we can touch up on these points via phone and finalize our next step of action.
