The All-Too-Common Scenario

In April 2006, Joe Homeowner, with a 710 FICO, buys a house in Irvine, CA for $899,950. Putting 20% down, Joe financed the balance with a 2/28, 2% ARM for $719,960.

For the first 24 months, Joe’s principle and interest is $2,661 a month. In May 2008, his loan resets to six-month LIBOR (2.85) plus 3.0%, or 5.85%, with a new monthly payment of $4,247. Joe can’t afford the 60% increase, forcing him to default in July. The loan is now five months in default, and the lender initiates foreclosure proceedings.

	Apr 06	Oct 08
FICO Score	710	542
House Value	$899,950	$584,967
LIBOR	2.85	3.88

Meanwhile, the home’s value drops 35% to $584,967 (valuated on a 30-day quick sale), six-month LIBOR increases to 3.88 (October 2008) and Joe’s FICO plummets to 542. The Bank is pressured to eliminate the non-performing asset.

The Solution - A Financial Do-Over

Home Equity Partners acquires Joe’s loan for $292,484, part of a $75 million pool of about 100 similar properties.

Home Equity Partners gives Joe a credit of $134,993 in principal reduction plus forgoes unpaid interest and penalties on Joe’s loan, and adjusts his loan to a 30-year, 5% fixed-rate loan, which carries an affordable monthly payment of $3,140, a 35% reduction from his current payment of $4,865 (based on 6 month Libor of 3.88 plus 3.00, or 6.88%).

	On your own	w/HEP
Debt	$719,960	$584,967
Mo. Payment	$4,865	$3,140

Home Equity Partners shares half of the home’s upside appreciation with Joe. Joe reduces his debt, slashes his mortgage payment by almost $1,700 a month, and keeps his family in his home.

The Home Equity Win-Win Scenario

Home Equity Partners now owns a $584,967 (after deducting the credit), 5%, 30-year fixed first trust deed that it acquired for $292,484. Based on an eight-year hold and without any leverage, the first trust deed yields 10% and the yield to maturity (YTM) is 16.2%.

Home Equity Partners also owns an interest in the equity appreciation. Having acquired the loan at 50% of current market value, it receives 50% of the appreciation, effectively earning an additional return equal to the property appreciation rate.

If the property appreciates at a 4% annualized rate over the assumed next eight years, the overall annual (raw) return is the YTM of 16.2% plus the 4%, or 20.2%.

Home Equity assigns Joe a certified credit coach for only $15 a month. The coach helps Joe improve his FICO score to 680 within two years. Home Equity Partners sells Joe’s loan to Fannie Mae at par, increasing the YTM to 42.5% (excluding the equity appreciation rate of return).