Affordability may come first in the list of incentives today’s homebuyers are looking for, but a stable housing market and home equity protection take the lead over all other borrower considerations.
Making homeownership attractive and competitive in a rental market is a goal lenders have to consider as they update their new loan origination strategies and loan products.
Catering to that goal, 1st Advantage Mortgage—a Draper and Kramer subsidiary based in Lombard that operates across the state of Illinois—is offering a loan option designed to protect the value of the property “from future local market fluctuations for up to 15 years.”
According to the lender’s president, Paul Lueken, 1st Advantage Value Guard helps bring stability to the housing market.
“Homeowners and potential homeowners have lingering fears about the market,” he said. “We see 1st Advantage Value Guard as a way of bringing confidence in homeownership in Illinois and get people buying again.”
It is not an easy task due to the prolonged crisis and the very slow overall economic recovery when “too many qualified applicants are choosing to rent when they can buy,” he noted.
A 1st Advantage Value Guard loan is expected to attract these cautious prospective buyers by making them eligible to file a claim that allows homeowners “to recoup up to 20% of their original protected value amount” if and when they sell the property.
The said value is calculated at loan closing based on the local House Price Index provided by the Federal Housing Finance Agency at the official www.fhfa.gov website. Market movement for future claim payments is based on the agency’s index at the time of purchase. And according to executives, the FHFA index data provide a highly reliable valuation of future local market fluctuations for up to 15 years.
However, the product has certain restrictions. For example, homeowners are required to use the property as their primary residence for at least two years.
After a two-year “freeze” period homeowners are allowed to sell the property for a profit, or a loss, “and still be eligible to receive a check,” even if the local FHFA House Price Index has decreased in value.
The product made sense as the firm researched ways to be “a different kind of mortgage provider,” stated CFO Jim Hayes.
It involved a new partnership that allows 1st Advantage Mortgage to offer a loan option that offers some degree of protection from another real estate market downturn.
The 1st Advantage Value Guard loan has been made possible through a special agreement with
In partnership with EquityLock Solutions, 1st Advantage Mortgage has structured its 1st Advantage Value Guard loan to offer “discounted introductory pricing” that allows the lender and the borrower to protect home values at today’s market value.
The 1st Advantage Value Guard loan embraces the home equity protection while millions of homeowners continue to be “underwater,” paying monthly dues on mortgages that are much higher than the current value of their property.
This may be a less risky time to do this, given that given the severity of the crisis and a general consensus that housing prices are hitting bottom in a growing number of local markets, equity losses are expected to be far less drastic—compared to losses seen since 2007-2008 when the crisis was in full swing.
So far reaction to the value of equity protection type loans has been mixed. Supporters have mostly argued in favor of preventing “strategic defaults” on existing mortgages rather than looking into future equity protection.
In “The Responsible Homeowner Reward: An Incentive-Based Solution to Strategic Mortgage Default,” a paper published over a year ago by Wharton finance professor Alex Edmans, he researched how to prevent so called “strategic defaults.”
He recommended the Responsible Homeowner Reward, an incentive-based program that offers borrowers “a sizeable cash reward if they repay their entire mortgages.”
According to Edmans, the program could help both homeowners and the financial institutions holding the mortgages avoid the painful, costly process of a default and furthermore “benefit the entire housing market” by stabilizing neighborhood prices and preventing homes from being abandoned.
In the past few years, unsettling data indicating high risk of strategic default rates concerned the industry and the nation. Among others, a Deutsche Bank study published last year suggested up to 14 million U.S. homes were in negative equity, and the number would increase to 20 million by the end of the year.
Edmans’ paper cited research findings that indicated continuous increases in strategic-default-related foreclosures and also pointed to evidence that strategic defaults can be contagious.
It notes that since a default damages an individual’s credit rating and leaves homeowners incurring the cost and inconvenience of moving, “lenders do not need to offer 100% of the gap between the mortgage and the current price of the house to make a reward program worthwhile to the homeowner contemplating a strategic default.” Edmans proposed that a homeowner with a mortgage of $200,000 and a house worth $150,000 might be offered a payment of $20,000 from the lender when the mortgage is paid in full because defaults are also costly for lenders.
Same as Edmans, other mortgage credit specialists suggested solutions to the equity crisis. Ron D’Vari, CEO of NewOak Capital, an advisory, asset management and capital markets firm based in New York, proposed an option that shares loan risk between homeowners and the government by participating in a government equity modification program.
Such a program would enable the issuance of government guarantees on modified nonperforming mortgages that would require borrowers to give up equity participation. It could be “a timely answer to the current mortgage credit crisis,” argued D’Vari.
Coming full circle back to the present,
