Ask anyone that knows anything about our housing market and they will most likely agree that we need to keep more people in their homes to begin a housing recovery. The problem is that loan modification as we know it is non-existent and short sale or foreclosure obviously don’t do anything but make the situation worse. You would think that loan modification would be the best route. You would of thought that until the FDIC announced that over half of the borrowers who received a loan modification that did not include a principal reduction re-defaulted after multiple payments. What if the Servicer could reduce the principal on a mortgage in exchange for an option to share in the equity and potential appreciation of the property? Wouldn’t it be great to have a program that addresses the real problem….keeping people in their homes?
- What if there was a way to reduce or eliminate the Lenders loss mitigation costs normally associated with a Short-sale or Foreclosure?
- What if the Lender had a financial incentive to reduce the principal balance on a mortgage in a loan modification
- What if there was a real incentive to the Homeowner to stay in their home and not go to Foreclosure or Short sale?
- What if the Homeowner was able to stay in their home without the damage to their credit associated with a Short sale or Foreclosure?
- What if the Lender could participate directly in a borrower’s successful retention of their home vs. a second lien position?
All the above is possible with HEFI Home Equity Fractional Interest. HUD first proposed a program called “Hope For Homeowners” (H4H) last August that was based upon some of the themes above and it has failed miserably. Hope For Homeowners penalized the lender who was taking the biggest loss by passing the benefit of the Shared Equity to HUD and Ginnie Mae when the home appreciated with no return of the forgiven debt back to the original Lender that would reduce the principal balance.
- Why not a Win / Win?
- Why not have the Lender that is reducing the principal balance retain the equity?
- Why should the existing Lender be forced to sell off the now performing senior mortgage?
- Why not retain the newly performing loan and sell that loan at a future date at Fair Market Value instead of at a discount?
HEFI provides the Homeowner with a partner in their successful retention of their home instead of having their equity shared for life, as it is in Hope For Homeowners. In a Home Equity Fractional Interest (HEFI) the homeowner retains the right to redeem the HEFI and regain 100% of the home’s equity and allows the Lender that exchanged the reduced principal balance for a HEFI to maximize his recovery.
Some Benefits of HEFI
- Homeowners get to stay in their homes by granting a fraction of equity
- Homeowners retain their ownership rights
- Foreclosure costs to the surrounding community are avoided
- Homeowners preserve their equity and maintain their properties
- Likelihood of a re-default is mitigated
- In the event of default, the HEFI converts into a Tenants-In-Common allowing the HEFI owner to sell the home as a resale
There are several servicers testing HEFI throughout the country, several of the experts I have spoken to believe HEFI is a reality that will soon be a viable option for banks and struggling homeowners.
For more information about HEFI, contact EquiDebt Solutions
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Tags: HEFI, Home Equity Fractional Interest, Loan Modification, Loss Prevention
I am seeing a growing number of my short sales with equity lines declare bankruptsy to recover and cut their losses. Most of these people would leave anyway even with this program. I know this is sad to say, but over all there is a feeling of anger against the bank and the owners don’t care anymore. This is not always the case, but I do see this a lot. They feel it’s better to rent then rent the house they own.
Thanks for stopping by Ann. I can understand why your clients would feel that way. HEFI is a principle reduction tool. It would actually help your clients. Their home would be written down to fair market value for an equity interest in the home. I don’t think it would be like renting their own homes as they still retain ownership, but they give the bank or HEFI owner a percentage of ownership in their home. This equity interest is given back to them over time. Remember, without the principle reduction, it would not be uncommon to be $50,000-$100,000 upside down. Their payment is adjusted accordingly as well. HEFI has been around for some time, but it will become more common place in the months and years ahead. Check back for any significant developments. I plan on having an informational class soon regarding the features and benefits of HEFI. Thanks again.