More support for our Value Gap Refinance planby Tim Manni
It has been a while since we last mentioned our Value Gap Refinance plan here on the blog — it was September 2010 to be exact. Yet, Eugene Ludwig, founder and the chief executive of Promontory Financial Group LLC, recently wrote an article in National Mortgage News about his plan to end foreclosures which reminded us a lot of our plan.
While Ludwig didn’t mention HSH.com’s plan specifically, he outlined an idea that was extremely similar to ours. On January 10, 2011 Ludwig wrote:
More specifically, the government needs to use an existing federal entity — possibly Fannie Mae or Freddie Mac — or create a new one that would pay off and then refinance existing mortgages for a large class of homeowners whose properties have declined in value. This entity would then lend or guarantee a loan at today’s lower interest rates for a new mortgage at current appraised value. The government would recover the difference between the payoff amount and the new, smaller mortgage, with interest, through any appreciation in the home’s value when sold.
Here’s a short synopsis of how our plan works:
First a “value gap” is established by taking the original loan amount against the current value of the home. A “value gap contract” would be executed between the lender/investor and the government to cover the differential between the outstanding loan amount and the current value of the home. This amount, or payment, would not be made today, but rather deferred to the time when the property has been sold to another party.
Under this arrangement, the borrower would refinance to the present appraised value of the home. This would produce a new mortgage at a 100 percent LTV at today’s market interest rates. The homeowner would not be responsible for the difference in amounts.
Over time, natural price appreciation would serve to narrow the gap to the point where the government owes the lender or investor nothing. Any price appreciation after that belongs to the borrower when or if they decide to sell.
Even though we haven’t really discussed our Value Gap plan (a plan to help underwater homeowners refinance) in months, the truth is that the problem isn’t going to go away anytime soon unless something is done about it. If you haven’t already, be sure to check out our Value Gap Refinance plan and let us know if you think it could help underwater borrowers refinance at today’s low mortgage rates.