IF YOU'RE MAKING MONTHLY PAYMENTS ON A MORTGAGE THAT IS MORE THAN THE CURRENT VALUE OF YOUR HOME, HERE'S A SOLUTION THAT CAN REDUCE YOUR PAYMENTS EVERY MONTH - FROM NOW ON!! FORWARD THIS TO FRIENDS, SENATOR AND CONGRESSPERSON......!!!!



Reducing Mortgage Payments and Home Price Stabilization

TAKING THE NEXT STEP IN THE STIMULUS PACKAGE – “THE 3RD LEG OF THE STOOL” – REAL ESTATE MARKET STABLIZATION.

I have developed a solution to an important area in the Real Estate market. While it can theoretically be applied to all mortgages, it was specifically directed at “upside down” mortgages, which are glutting the foreclosure real estate markets. I am calling it ReDoIt.



“ReDoIt” will:

· REDUCE FEDERAL GOVERNMENT OUTLAYS needed to prevent many foreclosures
· PROVIDE THE FEDERAL GOVERNMENT AND LENDERS THE OPPORTUNITY TO RECOVER FUNDS
· ATTRACT PRIVATE AND INTERNATIONAL INVESTORS
· HELP STABLIZE REAL ESTATE MARKETS
· STIMULATE THE ECONOMY BY PROVIDING HOMEOWNERS MORE DISPOSABLE INCOME
· REDUCE LENDER’S CONSEQUENCES FOR REFINANCING MORTGAGES
· CAN BE EASILY IMPLEMENTED and MANAGED WITH EXISTING INFASTRUCTURE
· IS SELF-LIQUIDATING and REPAY TAXPAYERS OR
CAN BE CONVERTED TO CREATE A MORE EFFICIENT AFFORDABLE HOUSING OPTIONS.
· CAN POSSIBLY DECREASE FEDERAL DEFICITS WHEN ECONOMY RECOVERS
COUNTER THE UNINTENDED CONSEQUENCES OF ACCELERATING FORECLOSURES DUE TO
THE NEW STIMULUS PLAN


I have 30 years experience in the financial services industry and participated in the creation of many types of securities that have, in some cases, altered the industry. I am sure that you are extremely busy right now, but a few minutes of your time might prove valuable and give you a housing stimulus solution that might have significant biparisan public appeal.

If you contact me, and you determine you want to learn more, I will supply additional information, so that you can consider it in more detail.

Respectfully;
Al Scanlan



“RE DO IT”

Real Estate Debt Obligation Investment Trust Securities


By: A. E. Scanlan


While the “ReDoIt” concept offers a standardized method to resolve situations where a homeowner now has a mortgage greater than the current market value of their home, it could be applied to many other mortgage situations.

This concept offers a process, and a method to reduce the current capital outlays the Federal Government might need to stabilize this area in the Real Estate market. It can reduce and more efficiently leverage TARP funds needed to assist the Financial Industry with existing loans on homes where the current value is less than a homeowner’s current mortgage. It is this author’s view that if this is not addressed, new proposed legislation may actually have the unforeseen consequence of accelerating near term foreclosure rates. (Discussion will follow.)

Most economists agree that there is a strong need to create a way that will again attract private outside capital to this market. The “ReDoIt” concept can provide a new financial security that potentially may attract private capital into this part of the real estate market. It can provide mechanisms for the federal Government to more easily monitor its participation and provide the possible recovery of these expenditures.

The “ReDoIt” concept will afford Financial Institutions an incentive to renegotiate such loans by resolving the capital consequences of such “refinancing”. This can reduce the number of monthly foreclosures and assist in real estate value stabilization. Refinancing such mortgages will give these homeowners monthly payment reductions, providing them with more monthly discretionary income to spend in the consumer area, which will efficiently contribute to economic stimulus.

Currently, almost all the tools needed to implement and operate this concept already exist in the private sector and treasury.

It is therefore especially timely and important to at least review the following discussion.





INTRODUCTION

“REDO-IT” is an abbreviation for “Real Estate Debt Obligation Investment Trust”, which is a securities instrument designed to remedy the current real estate market condition in which many homeowners have mortgages that are now greater than the market value of their home. (Upside Down)

These mortgage situations will continue to put downward pressure on the Real Estate market, as owners are faced with higher monthly payments than the current value of their home should merit, regardless of lower interest rates. Even homeowners who can make these payments may feel compelled to default on the loan if the mortgage lender will not renegotiate the amount of the loan. And banks, mortgage lenders, and other mortgage securities holders are understandably reluctant to negotiate and post those additional losses to their already substantial losses.

It is difficult for Congress to give significant financial advantages to “new” homebuyers and not create public unhappiness for those buyers, who in good faith, bought a home or took out a when housing values were higher. Are they supposed to just be good sports and continue to make monthly payments for the next 20 or 30 years – while they watch congress give $8,000 tax credits and low interest rate mortgages to new home buyers. Mortgages for which they can’t qualify?

Many of these homeowners are already walking away from their properties. And new “stimulus plan” legislation makes defaulting even more attractive. They could default, allow their children, parent, or “friend” to buy them a new home and take advantage of the tax credits, new low interest rate loans, and forgiving of the tax liability on the defaulted loan. Whatever you think of the integrity of this choice, the new provisions (Tax Credits and 4% interest rate loans) will very likely increase the near term default rate. It is entirely possible that unless you resolve this situation, the $7,500 - $15,000 tax credits and low interest stimulus ideas may not be very effective. (As foreclosures increase and the sale of these properties continues driving home values down.)



“REDO-IT” OBJECTIVES

As previously stated, the “ReDoIt” concept offers a standardized method to resolve situations where a homeowner now has a mortgage greater than the current market value of his home. It can reduce or leverage the amount of current capital the Federal Government would need to resolve this situation. It can even potentially attract private capital into this part of the real estate market, afford Financial Institutions an incentive to renegotiate such loans by moderating the capital consequences of such “refinancing”. By reducing the number of monthly foreclosures, it will assist in real estate value stabilization. Refinancing such mortgages will give these homeowners monthly payment reductions, creating more monthly discretionary income to spend in the consumer area, which will contribute to economic stimulus.



WHAT IS A “REDO-IT” SECURITY?

It is a discounted Financial Security issued by an Investment Trust (or Financial Entity) that represents a unit of the future value of a refinanced home. They can be issued in units as small as $1000 (You would want a Unit size that attracts the largest amount of private capital.)


The easiest way to describe this is by giving an example:

(Existing Real Situation) A homeowner refinanced a $200,000 home in 2006, taking on a mortgage of $180,000. Its current market value in 2009 has plummeted to $100,000 due to many foreclosures in the neighborhood. While they are still current on their mortgage, they are making monthly payments of almost $1500 for a home that is only worth about $100,000. Additionally, this mortgage is a Variable loan and payments risk going up in the future – at which time they may be forced to default. They need to make a decision soon if they want to take advantage of the temporary ability not to pay taxes on all the defaulted portion of this loan. If they allow their son to purchase a different $100,000 home (not much different from the one they live in), they could take advantage of the new 4% interest rate and possible tax credits congress is proposing. While these homeowners are honest and responsible people, the value in just monthly payments alone is $400-600 a month. Since they are not wealthy, this is a considerable difference.

If the lender “refinances” it for a new loan of $100K, the lender will sustain a loan loss of $80K. This homeowner’s lender refuses to renegotiate their loan. However, it is very likely that this homeowner will ultimately walk away from this loan. If the lender wants to avoid the foreclosure costs, a possible costly process of reselling or even further discounted auction sale, they could use the “ReDoIt” process.


In the “ReDoIt” lending program, the “lender” would refinance the home with a $100K new First Mortgage and a Real Estate Debt Obligation instrument attached to the home for the amount of $80K. These “DoIt” units would be recorded with the property deed in much the same process as a “Second Mortgage” is currently recorded. They would then be deposited with the Debt Obligation Investment Trust, a mortgage pool of similar “ReDoIt” mortgages. The Real Estate Debt Obligation Investment Trust converts them to $80,000 of “ReDoIt” Trust Units. The bank would either hold these units or sell them. (Note: If the Federal Government wants to bolster Banks balance sheets, they could treat this as a “pre-refunding” or attach some margin values that would provide a mechanism to keep the financial institutions solvent.)

These (ReDo) Debt Securities, which represent the amount of the loss on the original loan amount (difference between the new loan and the previous loan), will have the same maturity as the new loan (probably 20 to 30 years). These instruments would be marketable (traded) securities. Since there are no current interest payments, they will obviously initially trade at considerable discounts. They would appreciate (or devalue) as homes increase (or decrease) in value. If sometime in the future, the home has gone back up to a market value of $180,000, the notes could be retired at full value through a home refinancing or when the owner sells the home.

The Federal Government could be an initial direct purchaser and/or guarantor and give the banks holding them, a favorable “mark to the market”, or some other favorable incentive to hold them. Or the Federal Govt. could guarantee them and make them very safe securities that would be attractive for pension plans or other conservative investors seeking long term growth. The value of these securities would trade based on expectations of the appreciation (or decline) in home values – or in relation to the value of a created Home Real Estate Value index.

One of the advantages to this security process for the Government (or a lender) is that if the real estate markets recover anytime during the duration of these loans, the Government could resale (or retire) these securities for a likely profit. If a lender allows the home to go through a foreclosure, that negative ($80K in this example) can never be retrieved. If the government simply doles out funds, it also can not retrieve those funds.

In the example above, it is very likely that the issuance price would be less than 20%, or $16,000 on the $80,000. If the value of the home went back to only $116,000, the Federal Government, or issuer (lender) would recover their initial investment. If the economy recovers and the home goes back up to the $180,000 market value, these units would have a total value of $80,000. This would represent a profit on the $16,000.

The $16K value I put on these instruments is only for explaining things in this example. The Federal Govt. could theoretically assign any value that best serves its intent, or allow the market to determine a value – just as stocks and other unit trusts function.



FREQUENTLY ASKED QUESTIONS AND ANSWERS:

WHO WOULD BUY THESE SECURITIES? WHY WOULD A LENDER PARTICIPATE?

Pension Funds, Hedge Funds, and other investors wanting to put some of their funds in Real Estate would purchase these securities if they believe the market is near the bottom or will go up again sometime in the next 20 to 30 years.

Today, investors who are going to auctions and buying foreclosed homes might prefer these “ReDoIt” units instead. They will offer better liquidity, larger diversification and less risk than buying a home that may require repairs and have hidden costs – or be difficult to sell or rent out in today’s market.

We also have very active markets ($billions traded) in strips, CATs and similar securities where people do not want current income, but are building funds for future retirement (etc.). Some of these securities were made less popular by tax laws that require accretion. If these “ReDoIts” were exempt from this, I am confident that $billions of outside/international funds would move towards this market.

Lenders will benefit from participating and marking down loans because it is better than allowing these homes to go into foreclosure. Currently, many homes sold at Real Estate foreclosure auctions are often selling at even lower prices than current market values. This then creates a further decline in the value of the Banks loans outstanding. Plus, the lender has foreclosure costs, lost interest due to the time a foreclosure may take, and so on. They can go the “ReDoIt” process, avoid these costly processes, and also receive additional funds for selling the “ReDoIt” securities to the Trust.

Also, investors with large cash or access to lenders dominate the foreclosure market – since many auctions require cash or fast closings. If instead of foreclosing, “ReDoIt” securities could be issued in smaller increments of $1000, as many investment trusts already do, and we would expand the capital moving into this market by allowing smaller investors a way to participate. They do not have to be “experts”, or large investors, or risk the ill-liquid direct purchase of a foreclosure – repairs – reselling costs - and so on. Additionally, an investor diversifies his holdings by owning a pool of mortgages instead of owning a single property.

For a bank that holds these securities, (they would deposit them in the trust), the Federal Govt. Can give them a favorable initial value so the bank can stay solvent. By changing the mark to market (value), we can tighten or loosen the credit available to the real estate markets in the future. This would have enabled cooling down the markets when real estate was clearly running up in an unsustainable way that contributed to this “crash”.

This might be another tool for Treasury that’s not reliant on the Federal Reserve. We could even possibly alter this individual lenders issuance value based on a lending institution performance. When a lender wishes to issue “ReDoIt” units they can be refused or given less “book value” for lenders whose foreclosure rate is above average. If they have a high loan loss, their securities have to be carried at a lower value. This will encourage better lending practices. It will also provide a mechanism to make it more difficult for questionable lenders to participate. A homeowner could still go to a different lender and refinance away from their initial lender. This would resolve the situation where many homeowners have no way to talk with current mortgage holders, as their loan has traded hands multiple times.

If Real Estate values improve, these securities will trade higher in the market, possibly allowing lenders or the Govt. to sell securities out of the portfolio. They would not necessarily have to be held to maturity. As the economy recovers, it is very likely that real estate values will improve and most of these securities will be retired early.

It is highly probable that the Federal Government is going to have serious financial issues in the not too distant future over entitlement programs. If between now and then, the economy has improved enough to have added value to these securities, it may be an added source of funds to the government.


WHY WOULD A HOMEOWNER DO THIS INSTEAD OF WALKING AWAY?

A homeowner would carry a “note” that takes away some of the appreciation potential that they would get if they simply walk away and were able to buy another home. But many homeowners will not want a foreclosure on their credit history. Everyone today is very much aware of the importance their credit ratings have on their daily lives. It affects even your Auto insurance costs. And many homeowners will find that they are unable to buy another home because of the damage to their credit a foreclosure creates. Additionally, moving is costly as well.... there are Moving expenses, possibly new points to pay on the new home loan and so forth.

The “ReDoIt” process will enable them to avoid the foreclosure and still have the lower payments of a loan that better reflects their home’s value. These lower monthly payments will be attractive enough to compensate (in part) for the giving up some of the recovered appreciation that will now accrue to these securities.

In reality, many of the early years of payments go towards interest and do not pay down that much of the principal anyway. If you are paying down $100,000 instead of $180,000 you may not be that much worse off (equity in the home vs. total 30 years of payments) even if the home value has gone back to $180K (or higher) by then.

(Example: A $100,000 loan at 4% will cost you $477 a month and $171,870 over 30 years. A $180,000 loan at 4% will cost you an additional $137,496 over 30 years, for a total of $309,366, with a monthly payment of $859.36. If you walk away from the home and have to pay 8% for your new $100K loan because you bashed your credit, it will cost you $734 a month and a total of $264,155 over 30 years, $92,285 more than doing the “ReDoIt”. Yes, if your house goes back up in value, you have signed away $80,000 of this – anything above the $80k is yours. But if you are unlucky enough to be in an 8% loan for $180,000, on a home that is now worth only $100K, you will make monthly payments of $1321, at a cost of $475,479 – vs. the “ReDoIt” $477 a month and $171,870 total outlay.)





By now, you should see that the “ReDoIt” units function similar to a “lien” on the home. If you cannot sell the home and fully “retire” these units by buying in units from the Trust, remaining units will transfer with the home. For example, your home has recovered to a value of $120K from the $100K it was when you “Refinanced”. In our example, you had $80K of units so you will be left with $60K in units that will transfer with the home. (You do not have to buy your specific home units, all units are standardized, and the buyer’s lender will simply purchase back 20 units from the trust.)

There is no doubt that a home with no “ReDoIt” units will be more attractive to a homebuyer than one that does have “ReDoIts”. (Every dollar a home might appreciate will be there’s). But the home will only be discounted in the market by what the trading value of the units is –not the full amount. In this example these units will have time value as in 30 years they appreciate to full value – but they will still be at discounts in the trading market. Why? In our example the market has appreciated enough that the home has regained 20K of its 80K – regaining 25% of the lenders original losses. This means the “intrinsic” value of these units is only $250 per $1000 mature value. They will trade this amount plus some value investors add for their optimism that the market will go up in the amount of time left to maturity. This is much the same as collateral bonds trade now. Let’s guess that at the time this home is sold for $120K, these units are trading at $400... a $600 discount. The $20K of appreciation would buy back 50 of the 80 units attached to this home – not just 20.

The value of these “ReDoIt” units will be determined, at some point by a free market that trades them openly. The more optimism there is about real estate the higher will be their value – the less the optimism, the less will be their value in the market. If real estate appreciates, they will gain real intrinsic value. They will trade at the intrinsic value plus the optimism and time value. This is similar to the way “stock” options trade now.

If sometime in the future our example home has appreciated back to the $180K value on the real estate market, these units will again trade at the face value of $1000. If it happens in 5 years, wonderful, the government has gotten back all its initial outlay plus a handsome profit.

In essence, this is a self-liquidating process. As the real estate markets appreciate, more and more of these units will get paid off as participants sell or refinance their homes.

I believe there is a significant number of homeowners who would trade future gains in their homes for lower payments now. It simply will make too much sense. Especially those who were refinancing homes. These homeowners already got these gains in real dollars when they took out mortgages. If someone bought a home for $100K refinanced it for $200K, they walked away with $100K in cash (less costs). If their home is now $100K again, they aren’t really giving away something they didn’t already get.



WHY SHOULD THE FEDERAL GOVERNMENT CREATE THIS PLAN?


First, as has been stated earlier, it would make some of the other currently planned stimulus legislation more effective and avoids some unintended consequences this proposed legislation might create. It could help stabilize a portion of the foreclosures that has not been addressed by congress. It can more efficiently aid the balance sheets of financial institutions with less government outlays than is currently being used. It can provide a means to recover the government’s outlays. And even more valuable, it may provide a better mechanism for controlling and adjusting the financial markets to changes ahead. (Simply by adjusting the “margin” or securities “book” value a financial institution can carry these securities at.)

The “REDO-IT” securities provide a standardized method to reduce the “current” amount of loans when a homeowner owes more than the current market value of their property. By providing these homeowners a lower mortgage payment we give them more monthly spendable (discretionary) income than the federal government could conceivably afford. This will save jobs and help stimulate the economy that is heavily dependent on consumer consumption.

It will also reduce the short-term capital consequences to the mortgage lender and enable the current property owner an option to avoid default on the loan. It will speed this process by standardizing it (reducing costs).

It will facilitate the ability to sell or transfer these properties by both the lender and property owner.

Additionally, and very importantly, they provide a mechanism for the Federal Government to potentially reduce, or even eliminate, the current Federal Government capital outlays needed to remedy these situations. And in a time of staggering Federal Deficits, deficits that could stall a future recovery with upward interest rate pressures, the “ReDoIt” idea should merit a serious and bipartisan fair look.







NOTES:

1. TAX ISSUES: Since Mortgage interest payments are Tax Deductible, reductions in homeowners mortgage payments will decrease a taxpayer’s Schedule A deductions. The reduced monthly mortgage payments from a “ReDoIt” refinancing will become taxable income. This will increase Federal tax revenue. That increase may in fact equal or exceed the cost of the Federal Government’s initial “cash” outlay to purchase the “ReDoIt” units such a refinancing might cost. (This will depend on the initial discounted valuation of the units. If $100,000 in units is issued at a price of $15,000, and this $100,000 reduction in mortgage payments saves a homeowner $4000 a year in monthly mortgage payments, that $4000 becomes taxable income, not a (Sch. A) deduction. If the taxpayer is in a 15% tax bracket, this will generate $600 a year in tax revenue. In less than 7 years the Government will receive all its initial funding costs back and the additional tax revenue can accumlulate as an additional sinking fund towards maturity of the units. If a taxpayer is in the 28% tax bracket, it will take only 3.6 years for the government to recover its initial outlay.
2. LEVERAGE: It is probably a fair estimate that under the “ReDoIt” concept the Federal Government can give 6 homeowners mortgage relief for the same outlay a direct cash infusion generates. Additionally, depending on the accounting rules, margin, or “pre-refunding” status a Bank/Lender is given, the capital relief provided the Bank may also free up considerable of its lending capital (free up loan reserves, etc.).
3. BANK/LENDER BALANCE SHEETS: Debt securities (Bonds, commercial paper, etc) must be carried on the books as a liability. Stock offerings are not. Investors who purchase stock are anticipating that the shares will gain value in the period ahead. Shareholders do not have to sell their securities back to the company, but can freely trade them in an open market with other investors. This affords a company the opportunity to raise capital without increasing debt payments. Banks/Lenders can shore up their capital needs by offering added “shares outstanding”, but this impacts earnings per share. “ReDoIts” offer a possible way of raising capital that would otherwise be lost through loan defaults, giving mortgage holders relief, and attracting capital (Federal or Private) that doesn’t add to their already difficult earnings and debt coverage.
4. FEDERAL GOVERNMENT DEFICITS: Current Troubled Assets Relief Program (TARP) strategies are adding significantly to the Federal deficit. These deficits require the continued issuance of Federal Government securities that compete for private capital that might be used otherwise (business loans, car and other consumer loans. Etc.). It puts upward pressure on interest rates and adds to future inflation. It places us at risk to foreign governments who purchase these securities. It is a Strategic Security issue, as well as a future economic growth issue, that anything that can reduce these deficits and accomplish our objectives be a priority. “ReDoIts” deserve this important consideration.
5. FEDERAL ACCOUNTABLITY: “ReDoIt” is specifically targeted at home loans. It does not go into a Bank/Lenders general accounts that can pay for Vegas trips, new acquisitions, high salaries or any other misdirection. It is easily tracked, traceable, managed and potentially will be recovered (not from the Bank/Lender, but on the eventual sell or refinancing of homes as they recover value.)
6. IMPLEMENTATION AND MANAGEMENT OF REDOITS: There are already many securities on the market traded in this manner. They may be “DoIts” representing a fixed portfolio of bonds or stocks with a specified maturity. The computer systems and software to monitor and manage these accounts is already sophisticated enough and capable of handling this “ReDoIt” program. Accordingly, if the government would merely contract these existing capacities, it could be rapidly implemented. Following an “initial offering period”for some of the securities, they would then be listed on an exchange like other trading securities. They could be priced like an “option” on the portfolio (cash settlement), or “open or closed ended mutual fund”.
7. RISKS: There is no doubt that these securities will carry risks. If the real estate market continues to decline, the value of these securities will diminish, and a full recovery could become more difficult. However, these “refinancings” will occur over time, which will average out values and discounts – which will moderate the early declines. At some point, once the market stabilizes, many mortgage holders are likely to still be down enough to be attracted to this process. If the early offerings have been so negatively impacted as to be unattractive, new offerings could be fractionalized with separate unit trusts – continuing to attract new private investors. As early offerings are moderated by subsequent offerings, the Federal Government could still make a full recovery or profit. (Similar to averaging purchases in the stock market.) It might be pointed out that the only way mortgage holders will find this process unattractive is if their homes are appreciating at such a rate that they no longer want to give away their appreciation potential. When this becomes the case, the government is well on its way to recovering these funds.