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Washington Discusses HEFI
HEFI received well by Washington. Nevada first to discuss using HEFI for new government program
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US housing market hit by ‘walkaways’
By Aline van Duyn
Published: February 22 2010 22:13 | Last updated: February 22 2010 22:13
“Negative equity is a big challenge. It contributes to higher
delinquency and redefault rates,” Seth Wheeler, senior adviser at
the US Treasury, told a conference this month. “We will continue
to study the reduction of principal where appropriate,” he adds,
though the form it would take has not yet been determined.
Many mortgage investors and housing
experts believe it has to be dealt with.
“The housing problems run very deep, but so
far policies have just kicked the can down
the road,” says Laurie Goodman, analyst at
Amherst Securities, a broker that
specialises in mortgage investments. “To get
an economic recovery you need to fix the
housing problem. And to fix the housing
problem, you need to fix the negative equity
problem.”
....more
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- What is a HEFI?
- What is the HEFI
agreement?
- What are the Key HEFI Owner Considerations?
- What are the Key Homeowner Considerations?
- What does the Option mean to the homeowner?
- Are there any costs to the homeowner?
- Does the property need to be owner occupied?
- Does the first mortgage have to impounded?
- Can the HEFI be transferred?
- What happens if the homeowner goes into default on the HEFI agreement?
- What can the investor do in the event of default by homeowner?
- Is the HEFI just like a SAM (Shared Appreciation Mortgage)?
- Are the terms of the HEFI flexible?
- Does the HEFI Owner share in the amortization of the mortgage principal by the homeowner?
- What affect does the HEFI have on other programs or subsidies?
- Is Principal Reduction Fair?
- Can banks hold HEFIs on their balance sheet?
The Home Equity Fractional Interest Agreement (HEFI) ©
Based on US Patent #7,516,099 issued in April 2009 to Home
Equity Securities LLC (HES) and licensed to EquiDebt Solutions,
the Company has created a consumer finance innovation to augment
debt-only home financing – the Home Equity Fractional Interest
Agreement (HEFI). EquiDebt, along with HES, has created methods
that could be used for pooling, securitization and trading.
The HEFI program allows homeowners to offer fractional equity
stakes in their homes while retaining virtually all of the benefits
of home ownership.
It could be used in several different situations, such as the
three examples given here:
1. For homeowners with distressed or unaffordable mortgages, the
HEFI Agreement would be utilized to reduce the principal balance
of the distressed mortgage and convey a passive equity interest
in the property to the Lender / Servicer who agrees to reduce the
size of the distressed mortgage to make it affordable for the homeowner.
2. For existing homeowners with adequate equity, the homeowner
would receive cash from the HEFI Agreement, which could be used
for asset diversification, home improvements, credit card debt
repayments, children’s or grandchildren’s education, other early
bequeathals or to augment income in retirement without the overhang
of new debt.
3. For new homeowners, builder, developers and municipalities, the HEFI Agreement would
facilitate down payment support by a third party to reduce the
overall cost of a new home purchase.
The HEFI Agreement is a stand-alone, standardized and scalable
instrument. It has the ability to be standardized on a national basis and
thus pooled with like instruments and become freely tradable in the
capital markets without any further involvement of the original
homeowner or mortgage note holder. This favorably contrasts with what
otherwise would be numerous bi-lateral contracts among
homeowners and financial institutions that differ at every
institution and that would get severely discounted if monetized
The HEFI Agreement comprises a new financial asset class
that could be pooled, securitized and sold to pension funds,
hedge funds, private equity funds and I-banks or high net-worth
individual investors. These institutions – in time -- would
likely further distribute the HEFI pools to many other types of
foreign or domestic investors.
© 2007-2009 Home Equity Securities LLC
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Investment Structure
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The HEFI agreement is a contract between a homeowner
of a single family residential home and a third party such
that the homeowner receives an economic consideration
from this third party at issuance, and this third party
receives the right to receive a percentage of
the property’s sale proceeds above the initial mortgage
amount when the HEFI is redeemed or house is sold or refinanced.
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HEFI Issuer (Homeowner)
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The homeowner contractually agrees to share with a third party a
pre-determined percentage share of today's equity and the future
appreciation in exchange for the consideration provided by the third
party. The homeowner has the responsibility for all debt service,
operating expenses and maintenance costs of the property and
would continue to receive the tax benefits available for
making such payments.
Except for a very small service fee (currently $10/month), the
homeowner would have no monthly payments to make for the
maintenance in good standing of the HEFI.
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HEFI Owner
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At issuance, a third party provides a consideration to the
homeowner in the form of a direct cash investment paid to
the homeowner, or the consideration can be applied towards
retirement or reduction of an existing mortgage or other
liens on the house. The
investment is totally passive, similar in concept to
ownership of common stock in a corporation.
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Issuance Price
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The consideration offered by HEFI Owner for this fractional interest would be based on
(for loan modification purposes) the estimated amount needed to bring the first mortgage
to a sellable level based on a new appraisal of the current value of the property and/or
bring the monthly payments in alignment with the debt-to-income ratios necessary to adhere
to underwriting standard of the purchasing lender.
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Estimated value of the HEFI
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The HEFI Agreement is a standardized instrument similar to a call option on the home’s
equity. The estimated value of the HEFI could be its par value, or it could be influenced
by expectations on various factors such as interest rates, home price appreciation potential,
volatility of home prices, location of the property, etc.
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Legal Contract
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The HEFI Agreement is a formal, enforceable contract between
the Homeowner and the HEFI Owner.
This contract is recorded as a lien against the
property in County property recording offices, and would be
subordinated to any mortgage recorded on that property. An
entity called HEX (Home Equity Exchange) would issue,
register, record and service, as nominee, the resulting HEFI
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Issuance Term
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The homeowner and the HEFI Owner could enter into this agreement at any time, either when
the homeowner is initially purchasing the property, or afterward.
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Maturity Term
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The HEFI would remain in effect until the predetermined Expiration Date
or when the homeowner sells the
house or redeems the HEFI. The homeowner will
also have certain buy-back rights, based on terms and conditions
that will be spelled out in the HEFI Agreement.
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Standardized Contract
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The HEFI is a standardized contract across the US, irrespective
of the price or location of the underlying home.
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Investor Economic Interest
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The HEFI contract entitles the HEFI Owner to a
pre-determined percentage share of existing and future home equity in the form
of an option in equity participation. The percentage will be specified in the
HEFI Agreement.
The value of this economic
interest upon sale of the home will be subject to the
appreciation or depreciation in value of the home on a
pro-rata basis as this is a pure equity investment exposure
This is a strictly passive investment where the HEFI Owner (except
under certain extreme circumstances) would have no direct involvement in or
liability for the operations, expenses or maintenance of the
property.
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HEFI Owner Rights
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The homeowner is required to
notify the investor and receive written permission from the
investor prior to assuming any new debt on the property,
such as second mortgage, home equity loan etc.
HEX (Home Equity Exchange) will receive copies of all tax, mortgage and
insurance bills to monitor timely payment by the homeowner.
HEX will have the right to periodically inspect the
house (scheduled in advance with the homeowner) to monitor
the maintenance and upkeep of the property.
In the event of non-compliance by the homeowner on any of
the above during the term of the HEFI or any other Events of
Default, the HEFI Owner has the right to assume a Tenant-in
Common status with the homeowner, to step in and cure the
non-compliance by the homeowner.
In certain such circumstances the investor also has
the right to force the sale of the home.*
The HEFI Owner also has rights to
be protected against property loss due to fire or other
natural disasters by a sufficient homeowner insurance
policy. However, the protection would be subordinated to the protection
offered to mortgagors.
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HEFI Owner Liability
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The HEFI Owner’s liability is limited to the
investment consideration provided by the HEFI Owner to the Homeowner at HEFI
issuance. The HEFI is designed such that during the term of the HEFI, the
title of the home remains in the Homeowner’s name until the sale of the house.
As a result, the HEFI Owner has no direct ownership of the home during the term of
the HEFI. Upon the sale of the house or a HEFI Redemption, the HEFI
Owner would receive his pre-determined percentage of proceeds. Alternatively, if the
HEFI owner desires and the new homeowner agrees, the HEFI investor could retain the
same interest in the property subsequent to the sale, but this alternative would
strictly be a choice of the HEFI Owner.
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Mark to Market
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Post HEFI issuance, a third
party real estate appraisal entity will provide periodic
HEFI pricing estimates to the investor for mark to market
purposes. The pricing methodologies used in estimating the post issuance
HEFI pricing will be analogous to the pricing methodologies
used for pricing the HEFI at issuance.
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Transferability
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The HEFI Agreement has been structured to allow the
HEFI Owner to transfer the economic interest represented
by the HEFI to other investors prior to HEFI maturity,
without requiring any approval by the homeowner, or without requiring
a re-recording of the lien filed with the local County offices
at HEFI issuance. This
transfer would be facilitated within the HEX servicing
platform.
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Homeowner Economic Interest
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Upon future sale of the house, the homeowner is entitled to receive
the net proceeds from the sale of the home, less the mortgage
outstanding, less the HEFI Consideration (the initial equity
granted to the HEFI Owner) and less the percentage of net home sale proceeds above
the HEFI Consideration and initial or newly restructured mortgage amount due to the HEFI Owner.
The homeowner would typically also be solely responsible for transaction
costs involved in the sale of the property.
Post HEFI issuance, the homeowner retains the right to continue to receive
all the tax advantages he would normally receive for use of this
property as the primary residence (e.g. deductibility of mortgage interest
and real estate property taxes).
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Homeowner Residency Rights
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Post HEFI issuance, the homeowner retains all the
rights of homeownership (right of residency as primary home, right to make home
improvements, etc). The homeowner also retains the right to determine when to
sell the house, provided that such sale is within Fair Market Value pricing
considerations.
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Home Improvements
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The homeowner is solely responsible, in decision-making and
payments, for major improvements to the home. At this time
the Homeowner would not receive any additional credit or
consideration for such improvements.
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Homeowner Obligations
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The homeowner is obliged to pay
all real estate taxes, mortgage payments and insurance
premiums due on a timely basis, as well as any agreed to
HEFI servicing fees payable to HEX. The homeowner is fully
responsible for ongoing maintenance of the property.
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Equity Investment – no monthly
interest or principal payments
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The consideration received by the homeowner represents an equity
investment by the HEFI Owner. As a result, there are no monthly interest
or principal payments to be made by the homeowner to the HEFI Owner during
the term of the HEFI Agreement, nor is there a return of principal payment
due at the maturity of the HEFI. The selling price of the home will
determine the maturity value of the HEFI.
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Title
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Post HEFI issuance, the title of the house remains in the sole name of
the homeowner until the house is sold.*
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Redemption Provision
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The homeowner shall have the right to redeem the HEFI interest from the HEFI Owner
at such times agreed to at the time of issuance of the HEFI contract, The redemption
price will be based upon the estimated market price of the HEFI (determined by a
sophisticated third party appraisal methodology similar to the one used in pricing the HEFI
at issuance). Certain additional terms and conditions relating to the redemption
provision may be included in the HEFI Agreement.
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Sale of Home
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The homeowner can sell the house at any time to an unaffiliated third party
at or close to market prices (as determined by third party appraisal).
The HEFI Owner, however, will have a right of first offer to prevent
price fixing on the part of the homeowner. If the sale price offered to an
unaffiliated third party buyer is within a mutually agreed upon percentage
range of the price offered to the HEFI owner, and at substantially the same
terms, the sale can go through – otherwise it becomes subject to the HEFI Owner's right of
first offer once again. In most instances, the HEFI Agreement will specify that
the homeowner is solely responsible for transaction costs in respect to the
sale of the home. The new purchaser could assume the current HEFI
contract (if agreed to be current HEFI Owner) or apply for a new HEFI
Agreement.
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* Under certain circumstances,
the investor has the
right to assume a
Tenant-in-Common status
with the homeowner
(please refer to the HES
HEFI Agreement for more
details)
1. What the Agreement means: In exchange for consideration based on a
reduction of principal of Homeowner's current mortgage or
a cash contribution of down payment for
the purchase of the home,
the Homeowner will be giving the HEFI Owner an option with respect to the future value of
the home. The option means the HEFI Owner has the right to receive cash proceeds
based on the percentage interest in Homeowner’s equity above the original or newly restructured
mortgage amount at the time of the sale of the home, should the Homeowner decide to sell the property.
2. The Homeowner will be able to redeem the HEFI from the HEFI Owner: The
Homeowner will have the right to redeem the option in the home given to the HEFI Owner. To
do so, the homeowner must give the HEFI Owner 30 day's prior written notice of that
decision and pay an amount equal to the current estimated market price of the HEFI
(determined by a sophisticated third party appraisal methodology similar to the one used
in pricing the HEFI at issuance). Certain additional terms and conditions relating to
the buy-back provision may be included in the HEFI Agreement.
3. The Homeowner will be able to sell their home: The Homeowner will have the
right to sell their home at any time to an unaffiliated third party at or close to
market prices (as determined by third party appraisal). However, should the Homeowner
sell the house within the first 12 month period after executing the HEFI Agreement
without the written permission of the HEFI Owner, there may be penalty payments assessed
against the Homeowner’s expected proceeds.
4. How the fair market value of the home is determined: If the
homeowner decides to exercise the right to redeem, then the homeowner will need to
notify the HEFI Owner by way of HEX (Home Equity Exchange)in writing of the estimate of
the fair market value of the home at that time. The HEFI Owener then will have 30 days
to either accept the estimate of the fair market value or decide to have the fair market
value determined by the appraisal process explained in the HEFI Agreement. If the HEFI Owner
elects to redeem the option, then the HEFI Owner (via HEX) will notify the homeowner of
its estimate of the fair market value of the home and the homeowner will have 30 days to
either accept the HEFI Owner's estimate or have the fair market value determined by the
appraisal process. A procedure to resolve any further differences in valuation is outlined
in the Agreement.
There are standard fees associated with the initial issuance of the HEFI
instrument and they will be fully disclosed in advance. Once the HEFI Agreement is
executed, however, the only fee required from the homeowner will be a service charge
of $120 annually payable in two $60 installments to HEX. This is a fixed fee, regardless of the dollar amount of the HEFI.
The HEFI Agreement is primarily intended for owner-occupied residences; other
occupancy types are permitted under other circumstances where prescribed or permitted by
certain federal or state laws, such as military transfers or employment transfers. The HEFI Owner
may choose, at its discretion, to waive the Owner Occupancy requirement and allow a vacation/second
home or investment/rental property to be underwritten against the issuance of the HEFI. Should the
property in question currently be or become an investment/rental property, the HEFI Owner would not
have any claim on rental income received by the borrower.
The HEFI Owner has the right to transfer its ownership right in the HEFI Agreement
without any consent or prior notice to the homeowner.
What could cause a homeowner to become in default:
There are a number of ways a homeowner can become in default under the
Option Agreement, including:
- failing to make any required financial
payments in connection with the home (such as the mortgage, real
property taxes, insurance premiums or any homeowner association dues);
- transferring title to the home without the
HEFI Owner's prior written consent (unless it's to a trust established
primarily for the benefit of the homeowner or will);
- obtaining a second mortgage or line of
credit on the home (without Investor's prior written consent);
or
- making any false or misleading promises in
connection with the HEFI Agreement.
What could happen if the homeowner becomes in default: There are
serious consequences of default under the HEFI Agreement. For example:
a. The HEFI Owner would have the right (but not the obligation) to make a
default payment on behalf of the homeowner and then cause an increase in the Investor's
percentage interest in the home. If the HEFI Owner chooses to make such a default payment,
the homeowner would be required to execute certain additional documents necessary to increase
the percent of the HEFI Owner's interest in the property. However, the homeowner would have
the right (for a limited time) to redeem any such increase by paying the HEFI Owner the amount
of the default payment made on the homeowner’s behalf plus interest from the
date of the default payment.
b. The HEFI Owner would be able to take legal action against the homeowner and there could be a
forced sale of the home.
A SAM is a debt instrument where a HEFI is an equity
instrument. A SAM affects a borrower's CLTV and a HEFI, as
equity, does not.
HEFIs could allow for LTVs of almost any percentage. The HEFI
sharing percentages could be 50/50, 60/40, 40/60, etc. The
timing and vesting of equity could also be feathered in at
different rates and horizons.
No. The HEFI is currently structured so that it shares a
fraction of the value of the house (at sale or redemption) less
the new (or original) mortgage’s initial principal balance.
Therefore, payments by the homeowner that reduce (amortize) the
loan principal will fully benefit the homeowner.
We expect that HEFIs would not preclude borrowers or lenders
from availing themselves of other government programs, such as
homebuyer tax credits or interest reductions.
Principal Reduction on its own may not be
fair. But, there is a way to reconcile the Moral Hazard. In the
loss mitigation arena, by avoiding inefficient foreclosures,
HEFIs may help homeowners, as well as lenders, government,
taxpayers and communities. HEFIs require that homeowners give up
something to get something – in return for principal reductions,
they forego a portion of current equity as well as a percentage
of future appreciation. A HEFI program need not involve any
additional government subsidy.
Banks could hold HEFIs as investments, similar to how they
hold equity participations in commercial real estate projects.
It should be pointed out that the HEFI does not put the owner of
the HEFI on the title of the property. The HEFI is recorded as a
lien against the property, much the same as a mechanics lien, a
tax lien or a legal judgment is recorded.
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