ISGN Formally Launching Shared Equity Program for Underwater Borrowers
Mortgage technology and services provider ISGN is formally launching an equity sharing program this week for underwater borrowers. Under the program, lenders will voluntarily reduce a borrower's mortgage principal in exchange for a slice of ownership in the home. In an ideal situation, the lender will make a profit off the future appreciation of the home, assuming values increase. Equity sharing programs aren’t new; in fact, ISGN’s Real Estate Shared Equity Transaction (RESET) program is based off a plan initially introduced to give homeowners a way to take equity out of their home without using a traditional home equity line of credit (HELOC) or second mortgage. The new plan, they hope, will help mitigate the risk of negative equity homeowners from strategically defaulting. ISGN and partner EquityRock, formerly known as REX&Co., believe that by working with banks to facilitate equity sharing deals, homeowners can pay a mortgage with a reduced principal without the moral hazard of a write-down. “We’ve worked through downturns before and the strategy has been to throw people at it and wait it out and eventually the market will return,” ISGN’s Bill Garland, the senior vice president in charge of the firm’s home retention unit, told HousingWire. But in today’s market, the name of the game is do anything to stabilize the one to four unit housing market. “Until then, we’ll have more defaults, no liquidity, and high loss severity.” As HousingWire’s extensively reported, including the February cover story, negative equity is considered the biggest trigger to a borrower strategically defaulting. There are as many as 11.3m borrowers who owe more on their mortgage than what their home is worth. Recently announced federal incentive programs try to address the problem of negative equity, but many in the lending community are concerned about the moral hazard of making principal write downs for borrowers that can afford their payments, but chose not to because their home’s value decreased. With some predicting negative equity being a problem through at least the middle of the decade, there are many solutions being pitched to solve the problem. ISGN’s RESET program is one of a handful of similar initiatives developed to tackle the strategic default issue. In an ISGN-facilitated RESET agreement, the bank agrees to modify the borrower’s mortgage to reduce the loan-to-value (LTV) from a negative equity position to 90% LTV. The interest rate stays the same, but because the principal is now lower, so is the borrower’s monthly payment. In exchange for the write down, the borrower signs an agreement that when the house is sold, the mortgage is paid off and whatever profits are left are split between the borrower and the bank. The percentage of the split varies, depending on the terms of the agreement the bank picks. The arrangement hinges on the property appreciating in value. But even if it doesn’t, EquityRock co-CEO James Riccitelli said the losses associated with a distressed sale are greater. In addition, before the home is sold, the borrower returns to making timely loan payments, bringing the mortgage back into performance and out of default. “It’s a better deal for the lender,” he said. EquityRock spent approximately $30m vetting the legal process for these equity share transactions, and so far, it’s been cleared in 14 states, covering more than half of the US population, Riccitelli said. For ISGN and EquityRock to profit from facilitating these transactions, the firms collect a small fee for each completed agreement. EquityRock also envisions the equity sharing agreements to become assets traded by investors, where additional profits lie in facilitating those transactions. So far, ISGN and EquityRock are shopping the initiative to lenders, but no one has yet to sign on. As it continues to market the service, ISGN and EquityRock are asking lenders to provide information on recent loans that have fallen out of the Making Home Affordable Modification Program (HAMP). With the data, a report is prepared to analyze which of those loans may benefit from an equity sharing arrangement. “The problem is far too big this time, we can’t ride it out,” Riccitelli said. “If we could do this on a couple of million loans, that’s a home run right now.” Write to Austin Kilgore.