Editor's note: This letter suggests a local solution to the nationwide mortgage meltdown.
By Roger Marment
Objective: To allow homeowners, who are delinquent in their mortgage payments and whose homes have negative equity, to remain in their homes indefinitely while making more limited payments to the local municipality.
Structure: The local municipality would assume titles to qualifying homes. The owner remains in the home but pays rent to the municipality. The municipality pays a portion of the rent it receives to the original holder of mortgage. The program is funded by the municipality issuing housing bonds under the Housing Relief Program, part of the federally underwritten Troubled Asset Relief Program (TARP).
In October 1996, the Smith family buys a house for $500,000. They are given a $400,000 mortgage by M Bank at rate of 6.2% for 30 years, equating to a monthly payment of $2,500. In addition, they escrow their taxes of $500 per month.
H Bank provides a HELOC to the Smith family of $50,000 at 6%, equating to a monthly payment of $300.
The total monthly payment for the Smith family for mortgage, taxes and HELOC is $3,300.
In February 2009, the house has declined in value by 30% to $350,000. The Smith family is 90 days delinquent in payments (Mr. Smith's overtime has been cut and his wife has lost her part-time job), and the bank is considering foreclosure. There is no willing buyer for the house at a level that would allow for repayment of mortgage and HELOC.
The Smith family transfers the ownership of the house to the local municipality. The municipality charges rent based upon the assessed value of the house ($350,000). The rental rate is 5%, equating to a monthly payment of $1,460. Taxes remain constant at $500 per month. The $50,000 HELOC is restructured into an interest-free loan repayable over 20 years (5% of principal per year) equating to a monthly payment of $210.
The new total monthly payment for the Smith family for rent, taxes and loan equals $2,170, a savings of $1,130 per month.
The municipality accounts to the M Bank and H Bank 25% of the money received from rental payment and loan repayment; it retains 75% for interest payments to holders of housing bonds and expenses. Of the 3.75% (75% of 5%) retained by the municipality, bondholders receive a 3.5% coupon and 0.25% goes toward expenses of the program.
In 2014, the Smith family is back on its feet and would like to take back ownership of the house. It has paid $87,600 in rent in that time. The house value has recovered somewhat and is assessed at $450,000. Because the Smiths have been up to date with their payments for at least five years, they are given a 50% credit for the rental money paid to the municipality and can buy the house back from the municipality for $406,200.
M Bank has the first option to provide a mortgage to the Smith family. If it elects not to offer a mortgage, the Smith family can shop around for a mortgage. The municipality and H Bank continue to receive their 75/25 proportional repayment of the loan that was converted from the HELOC.
In the above scenario, had they been up to date for 10 years, they would have received a 75% credit for the rental money paid against the assessed fair value of the house. Had they been there for 15 years, they would have received a credit of 100% of the rental money paid against the assessed fair value of the house. For any period less than five years, they receive no credit for rental monies paid.
In 2014, the Smith family is back on its feet and Mr. Smith is offered a promotion to the company's headquarters in a different part of the country. He gives the municipality a month's notice. Once the Smiths have left, the municipality sells the house. It sells the house for the assessed value of $450,000 to the Jones family. The municipality splits the proceeds of the sale with M Bank at the same 75/25 ratio as it had split the rental income. The municipality and H Bank continue to receive their 75/25 proportional repayment of the loan that was converted from the HELOC.
Advantages of the Program
- Homeowners can stay in their homes by paying rent to the local municipality.
- Mortgage holders receive 25 cents on the dollar in interest payments and have first option to issue a new mortgage should the homeowner be in a position to become a mortgage holder again.
- The issuer of the HELOC recovers 25% of principal over a 20-year period but foregoes interest (on a loan that should probably not have been made in the first place).
- The municipality receives 75% of the proceeds of any house sale should the owner decide to move. The bank receives 25% of the proceeds .
- The Fed backstops the program to make it more attractive to buyers of the municipal bonds issued to fund the program.
Roger Marment is a banker with JPMorgan Private Bank in Greenwich, Conn.