Equity Sharing Finally Recognized in Principal Reduction

Editor’s Note: Interesting that this got zero attention from the press. This is the first official recognition of two things we have been saying here for 3 years:

1. For the Borrowers, there can be no effective modification nor any inducement to go into a modification unless there is a very substantial principal reduction such that the homeowner has at least a fair possibility of achieving some equity in the property whose value was misrepresented at closing.

2. For the Investors, there can be no effective modification nor any inducement to go into a modification unless they have at least a fair possibility of achieving some equity in the property whose value was misrepresented at closing.

3. The only way to achieve both is by reducing principal but  retaining an equity appreciation clause — something that has been used many times but is not widely known.

by Kevin Hardin

So is Principal Reduction is going to finally get some notice?

On Friday October 15th, Treasury announced changes to HAMP. In that announcement, see link to announcement here , Treasury specifies the use of Equity Sharing Agreements by lenders participating in the Principal Reduction Alternatives for loans that are non GSE.

Non GSE means loans that are not Fannie or Freddie loans. Though Fannie and Freddie constitute the bulk of today’s loan originations the bulk of the distressed loans are not Fannie and Freddie loans. Since Fannie Mae must approve loans modified under HAMP a common misconception is that they are Fannie owned loans. This is not true. When Treasury rolled out HAMP, Fannie won the bid to administer that program even for loans they do not own.

Equity Sharing is the concept whereby a lender shares with the homeowner some of the equity and future appreciation of the home. Using these kinds of agreements can be instrumental in putting responsible principal reduction into the process for loan modifications. Most loan modifications done to date fail to help most homeowners with the real problem, Negative Equity. If the principal is not truly reduced the homeowner ends up with a tax deductible rent payment as they will never own the home in most homeowners economic lifespans.

If you want to see this in action go to this short power point presentation here . The Thomson Law, PLC firm was instrumental in drafting the HEFI (Home Equity Fractional Interest) Equity Sharing Agreement in 2008 and is please to see Treasury acknowledging its power to help homeowners stop foreclosure and keep families in there homes.

If you have questions call Kevin Hardin at 602-774-3757.
www.EquiDebtSolutions.com

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