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Fixing The American Dream

By
Mortgage and Lending with Cherry Creek Mortgage

Fixing the American Dream

At its core, our program addresses the problem, which is a lack of equity.  While many can argue that stemming the foreclosure epidemic is important, we believe it is a symptom of that basic problem. 

Clearly, the inmates were running the asylum several years ago.  Brokers, lenders, investment bankers, and rating agencies all played a part in causing the crisis, but the only way out of this hole is by getting qualified borrowers into loans that make sense.  Loans that allow them to build equity rapidly and have control when it comes time to move up or move out, rather than being a slave to the whims of the market.  After all, a mortgage is a tool that allows everyday people to purchase a very large investment AND PAY IT OFF.  Unfortunately, that basic premise has been perverted into a tool used for speculation or simply living beyond our means. 

We believe that ultimately the market will be what brings all of us out of this crisis.  A stroke of a politician's pen does not have the ability to right the ship and may make matters worse.  We believe that political pressure to phase out GSE's will provide an excellent opportunity for private equity to introduce innovative products.  We believe that our creative use of these existing products will lead us in a positive direction.

Our program uses a 5% down payment, an 80% LTV 5 year interest only mortgage, and a 15% LTV 5 year second mortgage with a five year amortization.  We take the money saved from paying interest only on the first mortgage and pay off the second mortgage in 5 years.  We now have 20% equity in the property and a drastically reduced mortgage payment.  Now the borrower can either continue making the same payment and have their home paid off in 21 years, or direct those moneys to other savings vehicles.  This program seems simple...because it is.  These products exist in the marketplace today, but no one is using them as a complete program. 

 

Here is a brief synopsis of the our program, including more detailed numbers. 

Building Equity Through Housing (BETH)

Introduction: In order to address an increase in foreclosures, loan defaults, and devaluation of home prices, we have devised the BETH program.  This unique mortgage program uses existing loan products to rapidly build equity, reduce interest costs, eliminate Private Mortgage Insurance, and rebuild investor confidence, one home at a time. 

•       Problems

o   Increase in foreclosures

o   Decrease in home value

o   Little or no equity in homes

o   Phasing out of GSE's, mortgage industry being privatized

o   Private equity investment virtually non-existent due to low pricing and concerns over policy, underwriting standards, transparency, and integrity.

o   FHA not properly pricing risk, taxpayer being used to shoulder risk

o   Prevalence of one sided transaction, i.e., homeowners  sell and become renters

o   Short sales further drive down price of homes in neighborhood

o   Current path of  home lending is flawed

•        Solution-Building Equity Through Housing

o   Use existing home loan products, example: $150,000 purchase

Down Payment, demonstrates fiscal responsibility

•        $7,500

•        5% LTV 

First Mortgage

•        $120,000

•        80% LTV

•        30 year amortization

•        Interest only payment $500 for year 1-5, use savings to fund second mortgage payment

•        Traditional Principal & Interest Year 6-30

Second Mortgage

•        $22,500

•        15% LTV

•        5 year amortization

•        $424.60 monthly payment (P&I)

•        Use savings from interest only first mortgage to fund this principal/interest payment

At the end of Year 5,  the borrower will have 20% equity and $223.00 of additional discretionary funds

Borrowers will have 20% plus equity at a time when they are statistically likely to sell (Year 7)

Borrowers have discretionary funds to spend or continue to pay down principal

Eliminates Private Mortgage Insurance

Pricing is realistic and can be risk-based

•        Objections

o   Interest only has in recent times earned a bad reputation, as it was used by borrowers to purchase more home than they could afford.  This was further reinforced by a flawed assumption that home prices would increase in perpetuity.

o   Some argue that a single interest only loan could have the principal retired just as quickly, but there are few options with a single loan priced as competitively.

•        Ancillary Benefits

o   At a time when borrowers are statistically likely to move, year 7, they will have substantial equity

o   No PMI

Depending upon the tax law changes, PMI is not tax deductible if you earn more than $100,000.

o   Year 5-additional discretionary income

Stimulate economy

Pay down other debt

Makes first mortgage more stable, relaxes monthly budget

Can be used to accelerate mortgage payoff by 9 years.

o   Reduces one sided transactions

Home sellers purchase homes, instead of renting

o   Stabilizes neighborhood home prices by reducing number of short sales, which can make refinancing, selling or using home equity more difficult

 

  

  

  

  

FHA Loan

$150,000 Purchase

3.5% Down Payment      $5,250.00

1.0% Pre-Paid MIP           $1,447.50

Loan Amount     $146,197.50

Loan Payment (Principal & Interest)        $784.82

MIP***                $140.11

Total Payment           $924.93

               

Year 5, Total Equity, 10%...$15,748.69

          

***In year 13, Private Mortgage Insurance is no longer needed and the payment drops to $784.82.

 

 

Building Equity Through Housing

$150,000 Purchase

5% Down Payment          $7,500.00

1st Mortgage Amount   $120,000.00

Loan Payment, Interest Only, Years 1-5 $500.00

2nd Mortgage Amount  $22,500.00

Principal & 5% Interest  $424.60

Total Payment           $924.60          

               

Year 5, Total Equity 20%...$30,000.00

Year 5, Loan Payment drops to...$701.51

 

For the same monthly payment under the Building Equity Through Housing program there will be DOUBLE the amount of equity in five years.  Additionally, the loan payment will shrink by $223.09 after year 5.  Furthermore, if one continues to make payments at this level, the home will be PAID OFF in 21 years.

 

Attached is a scan of a relevant article on FHA, as well as the following link.

http://www.mortgagenewsdaily.com/02162011_housing_finance_reform.asp 

We are excited to hear your feedback and discuss our ideas in greater detail, and look forward to speaking with you further.

 

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