TAMPA, Fla. - A troubled mortgage market marked by tighter underwriting standards and increased foreclosures has led to a number of alternatives being proposed to traditional mortgages.
Among the options: "own-to-lease" programs, "shared appreciation mortgages," and even "rent-to-own." But not everyone is sold on such programs. Another credit union CEO says many members should simply be foreclosed upon. Read on to learn more about some of these alternative mortgage models in this week's special report.
1. The 'Own-To-Lease' Model
DALLAS-Under "own-to-lease" programs, which are still in their infancy, a lender buys the property back from the borrower, but then allows the former homeowner to stay in the home and become a rent-paying tenant.
Alternative strategies such as own-to-lease are emerging as foreclosures increase, creating difficult situations for borrowers and lenders alike.
Ed DeShields, president of HYCA Financial Services (known as Community Empower in the marketplace), helped put together a $100-million investment pool after successfully running a pilot program to test out the concept in 2005. "I don't know of a lender or a provider that is doing this other than us," he told Credit Union Journal. "We are the only own-to-lease bond issuer in the market that I know of."
In Community Empower's plan, a homeowner facing possible foreclosure agrees to sell the home to the third party trust and then signs a generic lease for up to 18 months. The now-tenant is given the option to purchase the home for its current appraised value when the leasing period ends. The former homeowner pays a 2% risk fee and first month's rent; the tenant must also pay a property management fee and a credit-counseling fee.
"They have to be in credit counseling or home retention counseling for the whole lease period," DeShields explained. "They obviously do not have a good track record in home ownership and we want to make sure they have good behavior going forward."
When the tenant can re-qualify for a loan through FHA they do a simple assumption at a fixed 7% over 30 years. DeShields argues the system keeps individuals in their homes while giving them a chance to avoid hefty negatives on their credit scores and teaching them to improve their scores. The lenders also win because they no longer have to assume the role of property owner and try to sell the homes for depressed values.
"We've developed a fund to be the third party purchaser of the property. We take the responsibility off the (lender's) balance sheets at the time of the transaction so they are free and clear. They are gone," said DeShields.
2. The 'Rent-To-Own' Model
TAMPA, Fla.-One CEO here is a big believer that credit unions can play a critical role right now in helping people get into-and stay in-a home.
"People who have jobs and have good intent, we're willing to help them...get into a home," said Florida Central Credit Union President Ed Gallagly when asked if credit unions should consider alternatives to standard home lending practices.
For instance, Gallagly believes a rent-to-own program could work for credit unions saddled with large mortgage portfolios.
"If you can find somebody who would like to qualify to buy (a home) or if they don't have the down payment, they could go in and rent it at a rate that would cover or nearly cover the mortgage," he said. "You'd like to sell it and recoup your loan but that's not going to happen."
Jim Blaine, CEO of State Employees CU is a bit more accommodating to the idea of a rent-to-own program run by a respectable credit union, but pointed out that there should be plenty of more traditional financing options for members of CUs that did not get hammered by the housing collapse
"We still do 100% financing," he pointed out. "We have not backed out of the market at all because we didn't do the bad junk."
Gallagly, a long-time advocate for lower-income consumers, added that it seems only fair that all or at least a large portion of the rent charged to a tenant under a lease-to-own program would go toward the down payment should the renter choose to make a purchase once his credit issues are laid to rest. One of the major hurdles, however, is coming to an acceptable rental price as many "would be giving (credit unions) a very difficult time" if they offered the homes for substantially less than the cost of the mortgage. Given the current market, the only way to find a tenant is to do just that.
3. The 'SAM' Model
MT. HOLLY, N.J.-With the housing slide came the credit crunch, a number of first-time or other potential homebuyers looking to take advantage of the market's prices are feeling the squeeze as they are unable to get loans.
Instead of turning away all but the least-risky borrowers with plentiful savings for a down payment, another option advocated by some lenders is the shared appreciation mortgage (SAM). Under a SAM agreement, the lender or another investor puts up the funds necessary to qualify the buyer for a loan without mortgage insurance or to lower the interest rate.
SAM agreements provide for some flexibility in how the investor is paid back, whether it's a buyout after a number of years through refinancing or receiving the upfront money plus interest after selling the property.
Kent Pipes, president of The Affordable Homes Group, said that widespread use of SAMs could "unlock the marketplace for thousands."
"Somebody who doesn't have a lot of money, but has good (spending) habits and a good credit report can become a homeowner," he continued. "I think that's a terrific opportunity."
Any mortgage servicer, including credit unions, could implement a SAM program with relative ease, according to Pipes, who added that the addition of a SAM to the home lending profile could attract a bevy of new members.
"You have to find institutions that are flexible, but I can see thousands of people jumping at the opportunity to become homeowners," he said.
Finding investors, on the other hand, is more difficult. Though SAMs have been around in concept for decades, Pipes is still looking for a test market for his particular program. He said that holding the deed with a third party while giving the tenant the sense that he is a true homeowner results in a risk-adverse situation with all parties benefiting.
"It takes (investors) out of the marketplace of having to manage the property, because the person living there treats it like a home-owning property," he said. "I think that test market would show that this is something that would really work."
4. A Model Skeptic
RALEIGH, N.C.-The "own-to-lease" mortgage alternative draws skepticism from Jim Blaine, CEO of State Employees Credit Union.
Blaine believes that the best thing that some homeowners can do is turn in the keys before they are foreclosed and just let their lenders eat the balance.
"There is absolutely no justification for keeping a member in an inappropriate mortgage and an inappropriate house," he said. "One of things we ought to be doing is telling people to pack their bags and move in with their moms. There is no sense putting lipstick on a pig."
Blaine said that his credit union takes a close look at members who "went elsewhere" for their mortgages during the housing boom and is willing to work with people who were swept up by the market and entered into bad mortgages. He argued that in many cases "the lender did not look out for their best interests," so State Employees credit union can overlook that if an individual is otherwise not blemished and has stable employment. (c) 2008 The Credit Union Journal and SourceMedia, Inc. All Rights Reserved. http://www.cujournal.com/ http://www.sourcemedia.com/
