Let’s look at an another example from the Bank's perspective. Assume they originally loaned $195,000 on a home that was originally worth $200,000. Now they find the loan has crept up to $200,000 because of late payments and penalties.
Their borrower has an adjustable rate note has just adjusted up from 8.5% to 10%, so their P&I payment has just risen from $1,537 to $1,755. They can no longer afford the payment and, with the current market, selling the home is not an option. They are a foreclosure waiting to happen with traditional financing tools.
That is not the case if they refinance the loan into Term Ownership.
If the Financial Institution is concerned about housing prices in five years, they can easily structure the transaction as a ten year term (or even a 15 year term). The ten year term would be slightly less for the borrower at $1,321 than the five year Term. The ten year figure is based on a term loan amount of $119,000 which is the sum of the $99,000 Term Loan price plus the $20,000 negative Equity added onto the Term Loan. The interest rate, though, drops to 6%.
In those situations where the financial institution already holds the Property in its own portfolio, it should be rather easy for the institution to refinance and act as both the lender and the investor. If not, then the lender may wish to act the part of the investor anyway or look for outside sources willing to fund the investment component.
If the bank forecloses, the loss will likely be around $60,000 and the asset would sell for approximately $140,000 after all costs are factored in. If instead they receive 10 year's worth of payments at $1,321, it will receive $158,520 in payments and get their share of the housing equity at the end of the term. Assuming the bank only gets $200,000, the total value of the transaction to the financial institution is $358,520. The transaction has become profitable.
In order to achieve a comparable result with the $358,520 at the end of ten years from the $140,000 received at the end of the foreclosure process, the bank would need to garner an Internal Rate of Return (IRR) of 9.86%. But if there is equity shared, a mere $30,000 (Meaning this $200,000 house is worth and $260,000 ten years from now), the IRR would have to be 10.746%.
These are good returns. These are excellent returns. Homeowners who are not too far upside down should be considered for refinancing with Term Ownership.
Assuming the home owner and the investor are willing to do a 5 year term, the 5 year term price would be 30% of the $180,000 current fair market value ($54,000) plus the negative equity ($20,000), for a total Term Loan of $74,000.
Here is where the bank would have to be willing to give up a little bit of profit. By offering a 6% interest rate (far better than the loss taken on a foreclosure and higher than the interest rates currently being charged on A Paper credit), the payments on the $74,000 Term Loan would be $1,430 - Lower than their Borrower's Original Payment! If this payment is affordable for this particular borrower, it should be made an option to them.
If the home owner and the investor opt for a 10 year term, the ten year term price would be 55% of the $180,000 fair market value ($99,000) plus the negative equity ($20,000), for a total term loan of $119,000).
Again, with a 6% interest rate (far better than the loss taken on a foreclosure and higher than A Paper credit), the $119,000 payments would be $1,321 - A Substantially Lower Payment than the Borrower's Original Payment! And, over a ten year period there is a substantial likelihood that the home will appreciate in value to the benefit of the Term Owner. download youtube videos