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The New Solution to Getting Your Home Above Water

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Homeowners who are severely underwater but want to keep their homes often have few options.  They can try to get their lender to modify their loan, but with Federal Housing Finance Agency head Ed DeMarco refusing to allow principal reductions on loans owned or guaranteed by Fannie Mae or Freddie Mac, chances are slim that they will be able to get the balance reduced. (Less than 3% of loan mods under HAMP involve principal reduction.) And unless they are lucky enough to be able to eliminate (“strip”) a second mortgage in bankruptcy, they probably won’t be able to use bankruptcy to help them get back to break-even, either.

That usually leaves them with the option to hang in there until some day in the future when their home is worth more than they owe. Many homeowners who aren’t willing or able to ride out years of uncertainty are instead choosing to “strategically default,” or walk away from their homes.

But there is another option. It’s called “strategic refinancing.” Pioneered by HomeLiberty, a Northern California-based start-up, it buys the homes of those who are severely underwater and sells them back to those same homeowners at or below market value. It allows homeowners to eliminate tens of thousands of dollars in mortgage debt while staying in their homes.

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Check Your Credit For FreeMark Moore came up with the idea for HomeLiberty after helping a family member with her upside down home loan.  A serial entrepreneur, Moore said he “tried not to do something in real estate,” but the opportunity to solve a huge problem — a $1.2 trillion problem according to Zillow — wouldn’t stop nagging at him.

After extensive research, which included reaching out to attorneys and regulators to make his program was on the up and up, he launched HomeLiberty with co-founders Patrick Smida and Patricia Hanratty, both of whom have extensive backgrounds in the home financing industry.

HomeLiberty only helps homeowners who have documented incomes and owe far more than their homes are worth. It approaches the lender, offering to buy the home for less than the current market value. (It also frequently purchases homes for cash at foreclosure auction or post auction.) If successful, HomeLiberty immediately sells it back to the homeowner at a predetermined price, at or near market value. The company then finances the purchase with a new private mortgage loan of up to 90% of the appraised value. “It’s not a rent-to-own deal,” says Moore.

If the deal gets done, the homeowner owns the home and has a new loan, but is no longer upside down. From there, the deal gets sweeter. The first 13 on-time payments go entirely toward principal, with the goal of further increasing equity.  (Payments are fixed for the life of the loan, so there is no payment shock in month 14.)

The new mortgage isn’t cheap. Most borrowers will pay 10 — 12%, rather than the 3-4% borrowers who qualify for the best rates can get today. But the combination of eliminating debt in the sale, and the fact that the first 13 payments are interest-free means homeowners can build equity much faster than they would have if they kept their old loan. “In 13 months our customers pay down more principal than they would in five years on a (traditional) 4% loan,” says Moore.

An additional benefit is that homeowners remain in their homes the entire time this process is taking place.  That means the home is more likely to be maintained in good condition. “I don’t want to remove a tenant,” says Moore.

[Related Article: Underwater On Your Home? Your Six Options]

Helping the Huxtables and the Cleavers

Homeowners are screened carefully to make sure they can afford their new loans.  But unlike traditional mortgages, high FICO scores aren’t required. “Our customers tend to be very good borrowers with bad FICO scores. They are good people,” he insists. “I ask most people to imagine the typical underwater homebuyer. They will describe people who are struggling. The truth is the average underwater homeowner is the Huxtables or the Cleavers.”

HomeLiberty is currently is focused on California and Arizona, both of which are “non-recourse” states, meaning that homeowners can often walk away without risk of being sued for a deficiency.  That gives it negotiating leverage, and does raise the question of how easy it will be to expand in other states.

There is also a question of how scalable the business model is. Moore insists that there’s plenty of room for growth, and one reason is that homeowners can typically get their loans below 80% loan-to-value fairly quickly. If their credit scores are strong enough, they may be able to refinance into a traditional loan in just a few years. These loans carry no prepayment penalty, so homeowners are free to refinance anytime. When they pay off their loans, those funds are then available to lend to other homeowners.

I asked Moore the obvious question: If banks are going to sell these homes to HomeLiberty for less than what’s owed, then why don’t they simply write down the principal instead?  He laughs. “Banks are not going to write down principal until the market forces them to do so. It’s the concept of ‘eating your baby.’ They are not going to cannibalize underwater but performing loans.”

One of the reasons the program works, he says, is that HomeLiberty is making the lender an all-cash offer that’s usually more than what other bidders for the property will pay, and can close in as little as 48 hours. That means a risky loan is off the lender’s books with a minimum of hassle.

So while pundits in Washington debate over the moral hazard of reducing principal balances on mortgages, HomeLiberty is forging ahead, helping homeowners save their homes one at a time.

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Image: Bill Ward, via Flickr

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  • http://www.home-liberty.com Mark Moore

    Gerri,

    First, thanks for a very fair look into the new program from HomeLiberty. Our customers are uniformly and enthusiastically pleased with the results of our FastTrack to Freedom program.

    In your article, you say “The new mortgage isn’t cheap.” I can understand how someone might think that if they see the 30 year APR and do not consider how the FastTrack amortization works. But, in actual fact, the FastTrack loans are exceptionally “cheap.”

    Simply put, HomeLiberty loans are *zero* interest (0%) loans for the first 13 on-time payments. Our borrowers pay no interest during that period. Zip. Nada.

    In the first 21 months, the homeowner would have paid *more* total interest on a 4% 30yr fixed than they would on a 10% HomeLiberty loan for the same amount financed.

    Here is the effective interest rate if the homeowner refinances in the following time frames:

    * 2yrs 4.91%
    * 3yrs 6.84%
    * 4yrs 7.80%

    If you add in the cost of 2 to 5 years of renting (assuming the alternative is just walk away), or the cost of throwing 2 to 3 years good money after bad (if they stay), and HomeLiberty loans are breathtakingly better than any alternative.

    Mark Moore, CEO
    HomeLiberty, Inc.

    • adrianna

      I would like to know when I can start my new loan with HomeLiberty. My mortgage is for 178,000.00 my home is worth between 60 and 70 thousand at the present time. Please send me some information on the cost of this program if any. Getting my home down to 10% is better than the loan I have now at 5.87 for 40 yrs at 178,000.00. Please email me (email removed). I am not behind on my payments but it’s a scary thought that I could be after all 40 yrs is a long time. I am employed and have been at the same company for 25 yrs. With that being said I hope to hear from you. Thank you! Adrianna

      • Gerri Detweiler

        Adrianna,

        Please contact them directly through their website. We have removed your email address to help protect you from getting spammed.

      • http://www.home-liberty.com Mark Moore

        Adriana, if you are in California or Arizona, we can start immediately. Please see our website for contact info or write to info (at) home-liberty.com.

  • http://www.girlsjustwannahavefunds.com Ginger @ Girls Just Wanna Have Funds

    Mark,

    The interest rate on your mortgage after purchasing it from the bank results in a higher payment for the homeowner. How does this help again? I understand you need to make money but let’s call this what it is: another way to take advantage of desperate homeowners.

    Using a $400k mortgage, the base mortgage rate at 5.8% is $2650. Home Liberty steps in and purchase that same mortgage from the bank at market value of $280k @10%=$2748.

    Great the principal is reduced by 35k but they have a higher mortgage payment. In my opinion, this is nothing more than a lion giving a gazelle a head start on the chase and we all know how that ends. It’s the same way homeowners and banks got themselves into this mess in the first place.

    This would be a better deal if rates were between 6-8%, then I’d be able to say that it’s a good deal for a homeowner.

  • http://www.home-liberty.com Mark Moore

    Ginger, this is a common misconception. Our program lowers monthly payments because of the 30% to 50% drop in home prices.

    In the situation where the principal is only reduced by $35K, it probably does not make sense to strategically default in the first place. Research suggests that strategic default starts to appear at 120% LTV, and is significant when the LTV exceeds 150%.

    It would be a better deal if rates were between 6-8%, but unfortunately, the market demands the 10-12% we charge. We are not a bank, so we do not have access to fed funds. When/if we do, we will pass this through to the customer.

    As it is, we give 0% for the first year. If you want the best of all worlds, use HomeLiberty for the forst year. Then refi at whatever rate you can get that should be much better than our rate. You seem to believe hey can expect 6-8%. There are no prepayment penalties, so they are free to refi whenever and wherever they wish.

    Even with the loan you describe, they would probably be much better off after the first year because of our FastTrack to Freedom program with 0% interest for the first 13 on-time payments. In that scenario, they would own over $56K of equity. And they will have paid zero interest.

  • Michelle Griffin

    Is this service available in Florida

    • Gerri Detweiler

      I don’t believe so. My understanding is that it is in FL and CA. But you can check with them.

  • http://www.home-liberty.com Mark Moore

    Michelle, HomeLiberty is currently available in CA, AZ, and MN. We are beginning to roll out nation wide, so we may be able to help in certain situations like yours. I encourage you to call or write.

    Mark Moore
    HomeLiberty, Inc.

  • http://www.credit.com/ Credit.com Credit Experts

    It’s unlikely. At the time to post was written, HomeLiberty was focused on California and Arizona, both of which are “non-recourse” states, meaning that homeowners can often walk away without risk of being sued for a deficiency. That gives it negotiating leverage, and does raise the question of how easy it will be to expand in other states.

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