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Software Patent Abstract
A process, system, software arrangement and storage medium are provided
for facilitate an ability (or provide a model) to determine a repayment
value on a loan and/or an investment for an asset (e.g., using a
processing arrangement). In particular, first data associated with
at least one of an actual time or an estimated time when the loan
remains unpaid is obtained. In addition, second data associated
with at least one of a sale price of the asset or a valuation of
the asset is obtained at the time the loan/investment is satisfied.
Further, the repayment value is determined based on, at least in
part, the first data and the second data. In addition, a further
process, system, software arrangement and storage medium are provided
to establish the conditions for a loan of an asset (e.g., using
the processing arrangement). The terms of the loan may be established
based on data associated with unmodifiable terms of the loan provided
by a borrower of the loan.
Software Patent Claims
25. A process for providing a model to determine a repayment value
on a financial vehicle which is at least one of a loan or an investment
for an asset, using a processing arrangement, comprising: a) providing
a first variable associated with at least one of an actual time
or an estimated time when the financial vehicle remains unpaid;
b) providing a second variable associated with at least one of a
sale price of the asset or a valuation of the asset at a later point
in time; and c) providing the model which is based on, at least
in part, the first variable and the second variable.
26. The process according to claim 25, further comprising: d) obtaining
data associated with substantially unmodifiable conditions of the
financial vehicle provided by a borrower of the financial vehicle;
and e) establishing the model based on, at least in part, the data.
27. The process according to claim 26, wherein the financial vehicle
is the loan, and wherein the model includes the time period when
the loan is to be satisfied.
28. The process according to claim 27, wherein the conditions include
a time period for satisfying the loan, and further comprising increasing
the repayment value if the loan in not satisfied within the time
period.
29. A process for establishing a model for a financial vehicle
which is at least one of a loan and an investment for an asset,
using a processing arrangement, comprising: a) obtaining first data
associated with substantially unmodifiable conditions of the loan
provided by a borrower of the financial vehicle; b) obtaining second
data associated with at least one of a sale price of the asset or
a valuation of the asset at a later point in time; and c) establishing
the model based on, at least in part, the first data and the second
data.
30. The process according to claim 29, wherein the financial vehicle
is the loan, and wherein the model includes the time period when
the loan is to be satisfied.
31. The process according to claim 30, wherein the conditions include
a time period for satisfying the loan, and further comprising increasing
the repayment value if the loan in not satisfied within the time
period.
32. The process according to claim 29, further comprising: d) obtaining
third data associated with at least one of an actual time or an
estimated time when the financial vehicle remains unpaid; and e)
modifying the model as a function of, at least in part, the third
data.
33. (canceled)
34. A storage medium which provides thereon a software arrangement,
wherein, when executed on a processing arrangement, the software
arrangement is capable of configuring the processing arrangement
to establish a model to determine a repayment value on a financial
vehicle which is at least one of a loan and an investment for an
asset, using the steps comprising: a) providing a first variable
associated with at least one of an actual time or an estimated time
when the loan remains unpaid; b) providing a second variable associated
with at least one of a sale price of the asset or a valuation of
the asset at a later point in time; and c) providing the model which
is based on, at least in part, the first variable and the second
variable.
35. A storage medium which provides thereon a software arrangement,
wherein, when executed on a processing arrangement, the software
arrangement is capable of configuring the processing arrangement
to establish a model for a financial vehicle which is at least one
of a loan and an investment for an asset, comprising: a) obtaining
first data associated with substantially unmodifiable conditions
of the loan provided by a borrower of the financial vehicle; b)
obtaining second data associated with at least one of a sale price
of the asset or a valuation of the asset at a later point in time;
and c) establishing the model based on, at least in part, the first
data and the second data.
36. (canceled)
37. A software arrangement which, when executed on a processing
arrangement, is capable of configuring the processing arrangement
to provide a model to determine a repayment value on a financial
vehicle which is at least one of a loan and an investment for an
asset, using the steps comprising: a) a first set of instructions
which is capable of configuring the processing arrangement to provide
a first variable associated with at least one of an actual time
or an estimated time when the loan remains unpaid; b) a second set
of instructions which is capable of configuring the processing arrangement
to provide a second variable associated with at least one of a sale
price of the asset or a valuation of the asset at a later point
in time; and c) a third set of instructions which is capable of
configuring the processing arrangement to provide the model which
is based on, at least in part, the first variable and the second
variable.
38. A software arrangement which, when executed on a processing
arrangement, is capable of configuring the processing arrangement
to establish a model for a financial vehicle which is at least one
of a loan and an investment for an asset, comprising: a) a first
set of instructions which is capable of configuring the processing
arrangement to obtain first data associated with substantially unmodifiable
conditions of the loan provided by a borrower of the financial vehicle;
b) a second set of instructions which is capable of configuring
the processing arrangement to obtain second data associated with
at least one of a sale price of the asset or a valuation of the
asset at a later point in time; and c) a third set of instructions
which is capable of configuring the processing arrangement to establish
the model based on, at least in part, the first data and the second
data.
Software Patent Description
FIELD OF THE INVENTION
[0001] The present invention relates to financial instruments,
and specifically, to loan/debt instruments. In particular, the present
invention is associated with process, system, software arrangement
and storage medium which is capable of providing various financing
options that may be based on the valuation of the underlying asset
at the end of the financing term, and which can depend on additional
information provided by the borrower of the underlying funds that
are secured by the loan/debt instruments.
BACKGROUND INFORMATION
[0002] It is known that mortgage markets may function in a sub-optimal
manner. For example, whereas firms can use both debt and equity
to finance investments, property holds remain restricted to pure
debt finance, in the form of fixed or variable rate mortgages. Indeed,
ordinary consumers are not provided with various options that may
be available to large business entities. It is known that debt can
be securitized, and the availability of additional mortgage product
investment options may provided additional vehicle for investment
options for various asset holders, enabling them to diversify away
from the high risks involved in options such as equities, and to
obtain the same expected returns at far lower returns. For those
who believe that markets exist to allow gains from trade to be realized,
it is clear that there is a strong case to be made that markets
in housing equity will develop at some point in the future.
[0003] A publication--"Housing Partnerships" by Andrew
Caplin, Sewin Chan, Charles Freeman, and Joseph Tracy, published
by MIT Press in 1997, describes various advantages that markets
in the housing equity market can provide to borrowers throughout
their life cycle. For example, property holds that may have liquidity
constraints, such markets enable them to have access to greater
housing options. For borrowers who have some familiarity with the
housing market, a extensive risk reduction benefits can be provided,
as these borrower likely no longer have to have their portfolios
dominated by a single home. Further, for more experienced borrowers,
there is the potential to secure funds out of their home to assist
with general expenditures, as well as to provide for certain unusual
expenses as may arise as health risks increase in later life.
[0004] In the past, various scenarios have been proposed to address
various changing needs of borrowers. For example, a shared appreciation
mortgage (i.e., "SAM") was developed to enable the borrowers
to gain access to funds at a lower interest rate than the then-current
high rates, by giving up a share of the appreciation in the home.
However, the popularity of SAMs was reduced due to the decline in
inflation. Other attempts to re-launch SAMs on a broader scale have
failed. The present invention addresses the failures of the previous
attempts by introducing the exemplary embodiments according to the
present invention.
[0005] Recently, there has been an introduction of shared appreciation
mortgages by the Bank of Scotland in the United Kingdom. In particular,
it is believed that Bank of Scotland offered the borrowers up to
25% of the value of the home up front in exchange for up to 75%
at point of termination, regardless of when such termination occurred.
In particular, a three-to-one ratio between the amount borrowed
and the share of appreciation owed applied even for loans for smaller
amounts. For example, a 10% loan required payment of 30% of appreciation.
This loan was open-ended, and had no fixed termination date.
[0006] One of the serious problems with the SAMs of the Bank of
Scotland and other conventional shared equity mortgages is the inflexibility
of their models which are used to determine the payback amounts.
For example, the L % in 3 L % of appreciation out rule used by the
SAMs of the Bank of Scotland involves a cost of capital to the borrower
that depends on many factor, such as the time to mortgage termination
and the rate of overall price inflation. Such variances in the cost
of capital can generally make the model not only difficult for the
consumers to understand, but also hard to justify in the marketplace.
Such difficulties are illustrated in the following examples:
[0007] Example A1
[0008] A borrower takes out a $100,000 shared appreciation mortgage
against a home that is valued at $500,000 using the SAM of the Bank
of Scotland SAM terms. According to the terms of this particular
SAM, this is a 20% up-front loan requiring the borrower to pay the
lender 60% of the appreciation at the point of termination. Assuming
that there is no inflation in the general price level, and the price
of the underlying property increases by 10% to $550,000 in the first
year. If the borrower terminates at that point, the loan repayment
is $130,000, corresponding to a 30% p.a. real cost of capital to
the borrower.
[0009] Example A2
[0010] Not only is the cost of capital with the loan of this form
fairly high in the view of swift termination, but it is extensively
influenced by the inflation. For example, in a variant of example
A1, there is 10% inflation in the first year and the same 10% increase
in the price of the underlying property. In such case, the value
of the home at the end of the year is $605,000 instead of $500,000,
and the amount due the lender at the point of termination is $163,000
instead of $130,000 (as in example A1). In this case, the real cost
of capital to the borrower of the SAM is roughly 50%, and the borrower
has been charged in real terms merely for the fact that there was
an underlying increase in inflation. The reason for this addition
increase is that the SAM treats appreciation and depreciation in
an asymmetric fashion.
[0011] Example A3
[0012] A scenario substantially the same as that of Example A1
and the only change is the holding period of the loan. In particular,
the price of the underlying property increases at a constant 10%
p.a. over a 10 year holding period, with a terminal price of just
below $1,300,000 at the end of year 10. If the borrower terminates
at the 10-year point, the loan repayment would be $580,000. Computing
the internal rate of return on this loan, the cost of capital to
the borrower is revealed as 19.2% p.a., which while still high,
is far lower than the 30% p.a. cost of capital in the case of termination
only after one year of this identical price trajectory. As the holding
period extends ever farther, the rate of return on this same loan
with a 10% p.a. rate of the price appreciation of the underlying
property is significantly decreased to a lower limit of 10% p.a.
One of the problems with such varying rate of return is that it
produces adverse selection, inducing borrowers with longer horizons
to select the product, as well as a potentially moral hazard which
may inducing those who use the product to retain the mortgages for
as long as possible.
OBJECTS AND SUMMARY OF THE INVENTION
[0013] One of the objects of the present invention is to provide
various techniques, models and instruments that would overcome the
deficiencies of the conventional techniques, models and instruments.
These objects are addressed by providing, e.g., a pricing mechanism
underlying the mortgage, and ability to provide investors with a
reassurance concerning the timing of fund flows.
[0014] Thus, exemplary embodiments of the present invention are
provided to address and overcome various deficiencies associated
with the conventional mortgage and other lending products.
[0015] A first exemplary embodiment of the process, system and
processing arrangement according to the present invention can be
provided which can include a dynamic loan-to-value ("LTV")
pricing model (e.g., a "Rental Replacement Rate"). For
example, conventional shared equity mortgages are not flexible with
respect to the time it took the changing values of the financed
home to take place, or the number of years that the mortgage can
be maintained. The first exemplary embodiment overcomes such problems
by basing the loan repayment obligation on, e.g., a changing or
dynamic LTV model, which allows for a control of certain undesirable
effects associated with poor incentive effects in conventional equity-shared
loan instruments.
[0016] In accordance with a second exemplary embodiment of the
process, system and processing arrangement according to the present
invention, techniques and models for prepayment and repayment of
the loan products that is associated with the equity of the financed
home can be utilized, and preferably together with the LTV models.
This is because, e.g., the mortgage products according to the present
invention can be calibrated and priced in the LTV terms, as opposed
to nominal dollar terms or dollar change in value terms as set forth
in the conventional loan instruments.
[0017] A third exemplary embodiment of the process, system and
processing arrangement according to the present invention can be
provided which include utilize the information supplied by the proposed
borrower to measure the termination of the loan, the availability
of funds for the investor, etc. It is known that the unpredictability
of debt holding periods may be ubiquitous, and can unnecessarily
destroys asset value of the loan product (e.g., in relatively illiquid
markets, in which long holding periods are typical). Previously,
little or no attention has been afforded to the predictability of
tenure of the loan product. The third exemplary embodiment addresses
this deficiency by, e.g., providing various options to avail the
predictability of the timing of cash-flows from the resultant pools
of corresponding loan/debt instruments. In addition to the options
associated with the term of the loan/debt, numerous other terms
can be provided to enable a predictable and managed self-selection
of the terms by the borrowers that can ultimately result in various
debt-related asset pools that may include characteristics that are
attractive to the investors. For example, the third exemplary embodiment
of the present invention does not have to depend on the data associated
with the LTV models, and addresses procedures for structuring various
debt instruments to enhance predictability of tenure. Thus, shared
equity mortgages can be one of many debt instruments for application
by this exemplary embodiment of the present invention.
[0018] These and other exemplary embodiments of the present invention
are described in further detail below. In particular, according
to one exemplary embodiment of the present invention can be implemented
using a process, system, software arrangement and storage medium
which are provided for facilitate an ability (or provide a model)
to determine a repayment value on a loan for an asset (e.g., real
property), using a processing arrangement. In particular, first
data associated with at least one of an actual time or an estimated
time when the loan remains unpaid is obtained. In addition, second
data associated with at least one of a sale price of the asset or
a valuation of the asset is obtained. Further, the repayment value
is determined based on, at least in part, the first data and the
second data. In addition, a further process, system, software arrangement
and storage medium are provided to establish the conditions for
a loan of an asset (e.g., using the processing arrangement). The
terms of the loan may be established based on data associated with
unmodifiable terms of the loan provided by a borrower of the loan.
[0019] In another exemplary embodiment of the present invention,
the determination of the repayment value excludes a use of data
associated with the value of the asset at the time the loan is secured.
Further, the determination of the repayment value may be capable
of providing the repayment value to be lower than the value of the
asset at the time the loan is secured. In addition, the determination
of the repayment value may be based on at least one of a maximum
repayment amount or a maximum repayment percentage at a termination
of the loan.
[0020] In still another exemplary embodiment of the present invention,
if the loan is being satisfied after a predetermined termination
date of the loan, a further repayment value of the loan can be established
based on the repayment value and without regard to either of the
maximum repayment amount or the maximum repayment percentage. The
repayment value may also be determined as a function of a rate that
is associated with a use of proceeds of the loan. The rate may be
a rental replacement rate or use of funds rate. As an alternative
or in addition, the repayment value can be determined as a function
of particular proceeds of the loan which have been previously authorized
and not utilized by a borrower.
[0021] In yet another exemplary embodiment of the present invention,
the repayment value may be modified based on at least one of additional
charges or additional fees associated with a maintenance of the
asset. Further, predetermined time periods for repaying the loan
may be established, and the repayment value may be adjusted if the
loan is satisfied outside the predetermined time periods, e.g.,
based on a value that is associated with an unpredictability of
a current market. An insurance component for the loan may be established
such that the repayment value may be determined as a function of
the insurance component. The insurance component may be associated
with a market value of the asset, and the determined repayment value
can be reduced based on the insurance component if the value of
the asset at the time of repayment of the loan is lower than the
value of the asset at the time the loan was initiated.
[0022] In addition, the rental replacement value may be a predetermined
value which is based on characteristics of the asset and/or current
market conditions. The repayment value of the loan may be increased
if the loan is satisfied prior to a predetermined termination period
of the loan. Further, the valuation of the asset can be automatically
produced during a predetermined termination period of the loan.
[0023] The asset may be real property, and the valuation of the
asset can be automatically produced and the repayment value automatically
generated when a borrower of the loan for the real property is required
to withdraw from the real property. Further, the repayment value
may be determined based on particular information regarding a repayment
of the loan provided by a borrower of the loan., and can include
an estimated time period for satisfying the loan. The repayment
value may be increased if the loan is outstanding after the estimated
time period, and/or reduced if the loan is outstanding within the
estimated time period. The second data may be associated with a
greater of the sale price of the asset and the valuation of the
asset.
[0024] These and other objects, features and advantages of the
present invention will become apparent upon reading the following
detailed description of embodiments of the invention, when taken
in conjunction with the appended claims.
BRIEF DESCRIPTION OF THE DRAWINGS
[0025] Further objects, features and advantages of the invention
will become apparent from the following detailed description taken
in conjunction with the accompanying figures showing illustrative
embodiments of the invention, in which:
[0026] FIG. 1 is an exemplary block diagram of a system that enables
an implementation of a lending application and process in according
to with an exemplary embodiment of a model of the present invention;
[0027] FIG. 2 is a flow diagram of an exemplary embodiment of the
equity-shared loan origination process in accordance with the present
invention;
[0028] FIG. 3 is an exemplary embodiment of a process according
to the present invention for enabling the borrower to self-select
a loan that is most desirable thereto according to the types of
available equity-shared loans;
[0029] FIG. 4 is an exemplary embodiment of a process according
to the present invention for determining the amount due for the
equity-shared loans
[0030] FIG. 5 is an exemplary loan-to-value ("LTV") graph
at future periods of the equity-shared loan/mortgage using the methods,
processes, software arrangements, techniques and models in accordance
with the present invention; and
[0031] FIG. 6 is a flow diagram of an exemplary embodiment of a
process according to the present invention to determine the payoff
in the terminal LTV; and
[0032] FIG. 7 is a flow diagram an exemplary embodiment of a process
according to the present invention to provide a valuation assessed
to any given property at a point of a prepayment.
[0033] While the present invention will now be described in detail
with reference to the figures, it is done so in connection with
the illustrative embodiments.
DETAILED DESCRIPTION
I. Dynamic LTV Pricing Model
[0034] One of the important features of pure shared-equity mortgages
is that such mortgages do not involve a payment of regular mortgage
interest during the term of the loan. Using these mortgage models,
instead of paying for the interest and principle during the life
of the loan, the borrower pays the lender the combined principle
and interest amount only at the termination of the mortgage. At
the point of termination, the total payment to the lender is primarily
dependent on the value of the property. The conventional shared-equity
mortgage products provide a formula connecting the extent of the
debt to the terminal value of the property.
[0035] For example, using the shared appreciation mortgages (SAMs),
the lender obtains from the borrower a note to repay a certain fixed
share of the appreciation of the underlying property. In the case
the SAMs made available by the Bank of Scotland, a borrower taking
a certain percentage (L %) of the value of the property up front
owed the lender 3 L % at point of termination, regardless when such
termination has occurred. This and other conventional models are
deficient in that they effectively decelerate market development.
One of the benefits afforded by the exemplary embodiments of the
present invention is the pricing model that is based on a dynamic
loan-to-value ("LTV") formula that is believed to accelerate
a future large scale development of a market in SAMs.
[0036] A. Exemplary Uses of Dynamic Loan-to-Value Pricing Model
[0037] In order for the market to develop, it is preferable to
provide a pricing mechanism which is less effected by the variances
of the national economy (e.g., in the form of inflation) and borrower
decisions (e.g., in the form of the date of mortgage termination).
In addition, the pricing should be perceived as being fair, in the
sense that the cost of capital should reflect the period for which
the money was in fact borrowed, while allowing the sharing of the
financial risks and rewards of property ownership between lender
and borrower. Further, the pricing should be relatively simple to
understand for all market participants. One of the exemplary embodiments
of the present invention addresses such needs by providing a system,
process, storage medium and software arrangement which bases the
debt of the borrower at any point in time on a model/technique which
allows for a dynamic accrual of the lender's interest as measured
by a share in the price of the underlying property. Provided below
are illustration of the operation and outputs of the exemplary model
according to the present invention which overcomes the deficiencies
and problems associated with the conventional shared-equity mortgage
models whose rate of return is profoundly effected by inflation
and turnover times. The exemplary dynamic loan-to-value ("LTV")
model according to the present invention can be based on a particular
pricing technique, e.g., the rental replacement rate, which can
be used to define the current rate of growth over time in the outstanding
LTV on the loan.
[0038] B. Exemplary Rental Replacement Rate
[0039] To provide the durability and flexibility to the market,
the exemplary embodiments of the present invention provide an exemplary
pricing concept, e.g., the rental replacement rate, R (or usage
rate) which can be important to determine the cost of the funds
to the borrower, and the return on capital to the lender. The exemplary
rental replacement rate can be used in a model in accordance with
the present invention to charge, e.g., a periodic rent (or usage
of funds) that can allow interest to be charged in terms of housing
or property units. This rate R can be a "pure housing/property"
version of the interest rate, and also can be flexible and adaptable
to changes in market conditions, consumer interest, and investor
interest.
[0040] Accordingly, this rate may be an additional price, since
the change over time and according to circumstances acts similarly
to the rate of interest on standard mortgages. On the other hand,
such rate is different from conventional rates on interest, since
such mortgage can be utilized in terms that are other than monetary
terms, i.e., in terms of housing value units. Various examples illustrating
the use of this exemplary model according to the present invention
can be used is described in greater detail below. For example, with
this exemplary model, it is possible to use a price that applies
at each moment that makes it clear to the borrower that he/she is
being charged for the use of funds, e.g., in terms of housing units
instead of in terms of money.
[0041] C. Overview of Equity-Shared Lending Process
[0042] An exemplary embodiment of a system for implementing the
present invention is shown in FIG. 1. For example, a central coordinator
of the overall equity-shared lending process can be referred to
as a contract pool manager 30. The contract pool manager 30 enters
into various mortgage contract distribution relationships with contract
originators 20, which then enter into contracts with asset owners
50 so as to lend funds or securities in exchange for an equity interest
in the underlying asset. The contract pool manager 30 arranges for
funds to be provided to the contract originators 20 in order to
fund the contracts. These funds are drawn from a warehouse facility
10, which could be funded in several ways. The contract pool manager
30 takes the contract, and pools them into a structured vehicle
(i.e., a "special purpose vehicle" 40). Interests in the
structured vehicle can then be sold to investors 60. Throughout
this exemplary process, the contract pool manager 30 can utilizes
a processing arrangement which may include a determiner 80, a database
70, and an apparatus which receives and/or stores external information
90 thereon (i.e., storage device which can store thereon title information
for the asset).
[0043] D. Equity-Shared Loan Origination Process
[0044] FIG. 2 shows a flow diagram of an exemplary embodiment of
the equity-shared loan origination process in accordance with the
present invention. For example, an application 160 is submitted
by an asset owner 110 (in step 120). If the asset owner 110 proceeds
to the next step in the process, the asset owner 110 can secure
a complying valuation 130 of such asset. The valuation procedure
(in step 170) and the application can be placed in a database 200.
Using a processing arrangement 190 (e.g., a determiner) and which
can access external information in step 210, the contract pool manager
240 can review data in step 250, and generates an offer or a reject
in step 260. This offer or rejection decision is recorded in step
220, and provided to the asset owner 110. If there was an offer,
the asset owner 110 accepts or rejects the offer 140 of a loan.
The acceptance or rejection by the asset owner in step 180 is recorded
and provided to the contract pool manager (or another acting as
agent for such throughout this process). If the offer of a loan
was accepted, loan documentation is generated in step 270. This
loan documentation is recorded in step 230, and reviewed by all
parties. If the transaction is finalized, then the asset owner completes
the transaction in step 150, and the contract pool manager 240 completes
the transaction in step 280.
[0045] E. Equity-Shared Loan Amount Due Determination Process
[0046] FIG. 4 shows an exemplary embodiment of a process according
to the present invention for determining the amount due for the
equity-shared loans. Throughout the term of the mortgage and/or
at termination, according to one exemplary embodiment of the present
invention, there may be times when the amount due should be determined
as set forth in step 420. The contract pool manager 400 can review
data in step 410 using a processing arrangement (e.g., a determiner)
470, and access both the external information 480 and a database
530 on per-need basis or automatically to determine the amount due
on the loan. The database 530 can store various records, such as,
e.g., the loan terms 430, a valuation model and results 440, loan
records 450, other valuation information or valuations for other
loan products or for other borrowers 460, other borrower data 490,
other asset data 500, loan documentation 510, loan application 520,
etc. This exemplary process can be performed by one or more processing
arrangements (arranged together or separately) which are provided
in communication with storage arrangements (e.g., hard drives, RAIDs,
RAMs, ROMs, CD-ROM drives, memory sticks, floppy disks, tapes, etc.),
and/or connected to a communications network (e.g., Internet, intranet,
cable modem, telephone, etc.). Indeed the data received and generated
using the processing arrangement(s) can be transmitted internally
and/or externally to other systems and arrangements, as should be
understood by those having ordinary skill in the art.
[0047] F. Exemplary Embodiment--Dynamic LTV Model
[0048] The concepts of the rental replacement rate and the Dynamic
LTV pricing process are effectuated by various Dynamic LTV models.
For example, FIG. 5 shows an exemplary LTV at future periods of
the equity-shared mortgage using the methods, processes, software
arrangements, techniques and models in accordance with the present
invention.
[0049] For example, in the time that the loan is outstanding, the
LTV on the loan grows at the contractually specified rate (e.g.,
the rental replacement rate) according to the exemplary embodiment
of the Dynamic LTV model. The above example can be further described
using the following model. For example, if a mortgage is initiated
at time t=0 in dollar amount M(0) on a property that has initial
value assessed either by the mortgage holder or an outside source
as V(0). The initial LTV on the loan utilizing the exemplary model
of the present invention, L(0), can be defined in the obvious percentage
terms as the ratio of the loan size to the property value, M(0)/V(0).
At any later time T>0 at which the mortgage is terminated, the
borrower owes the lender an increasing share over time in the value
of the property. The Dynamic LTV Model according to the present
invention can specify the terminal LTV L(T) on the mortgage at any
time at which it may be terminated. Thus, the pricing of the Dynamic
LTV model is preferably based on the accrual at a contractually
specified rental replacement rate.
[0050] As one example of the use of the dynamic LTV model in accordance
with the present invention, as shown in FIG. 5, the equity-shared
mortgage is issued initially at a 20% LTV, and having a cap at an
LTV of 49%. As shown in a graph 600 of FIG. 5, with a rental replacement
rate (e.g., a rate of the dynamic LTV of 3.75% per year, it takes
6 years for the LTV to grow to 25%, about 11 years to reach 30%,
approximately 18.5 years to reach 40%, and about 24 years before
reaching the maximum 49%.
[0051] As an example, consider a property with an initial value
of $500,000 and a terminal value of $1,000,000. If 20% of the initial
value (i.e., $100,000) is borrowed based on such terms, the initial
LTV (L.sub.i) would equal to 20. If the mortgage terminated after
ten (1) years, the final LTV based on such terms would be 29.1%.
Therefore, the initial loan of $100,000 would result in a final
payout by the borrower to the lender in the amount of $291,000 at
the end of this 10-year period (i.e., 29.1% of the terminal value
of the property of $1,000,000).
[0052] G. Further Examples
[0053] For example, one exemplary embodiment of the Dynamic LTV
model can be considered, in which the share of the property value
due to the lender grows over time at a constant exponential rate
(e.g., 4% per year over a fixed twenty year loan life). In this
case, the LTV at any time T prior to the termination in year 20
can be defined by a formula L(T)=20e.sup.0.04T. Rather than being
measured in discrete units, such as years or quarters, time in the
exemplary model according to the present invention can be taken
into consideration based on years which are fractional, and possibly
rounded to two or more decimal places.
[0054] Example I: Consider a borrower taking out a $100,000 an
equity-shared mortgage which utilizes the exemplary embodiment of
a model in accordance with the present invention against a $500,000
home in which the LTV at termination is defined by the formula L(T)=20e.sup.0.04T.
Assume that there is no inflation in the general price level, but
that the property increases in price by 10% to $550,000 in the first
year. If the borrower terminates at this point, the terminal LTV
on the loan is L(1)=20e.sup.0.04=20.8%. Therefore, the loan repayment
is the value of the home is multiplied by 0.0[L(1)]=0.208, yielding
a repayment amount of $114,400. This repayment corresponds to a
14.4% p.a. real cost of capital to the borrower.
[0055] Example II: A variant of the above Example I can be illustrated
in which there is 10% inflation in the first year as well as the
same 10% increase in the value of the property. In this case, the
value of the property at the end of the year is $605,000, instead
of $500,000. Therefore, the amount due to the lender at point of
termination of the loan is $125,800, instead of $114,400. It should
be noted that the 14.4% p.a. real cost of capital to the borrower
is unchanged by the presence of inflation, since the payment is
proportional to the value of the home, and unlike the conventional
SAMs, the model in accordance with the present invention does not
treat appreciation and depreciation in an asymmetric manner.
[0056] Example III: Consider a substantially identical scenario
to that provided above in the Background Information section, in
which the property price increases at a constant rate of 10% p.a.
over a 10 year holding period, with a terminal price being just
below $1,300,000 at the end of year 10. If the borrower terminates
at that point, the terminal LTV on the loan utilizing the exemplary
model of the present invention is provided by the formula by L(10)=20e.sup.0.4=29.8%.
This means that the loan repayment is close to $390,000. Computing
the internal rate of return on this loan, the cost of capital to
the borrower would be 14.4% p.a., which has not been impacted in
any manner by the holding period. The reason for such positive result
is that with constant property price growth and the constant accrual
according to the dynamic LTV formula, there are likely no factors
provided in the exemplary model of the present invention that may
account for the changes in the rate of return on the loan.
[0057] Example IV: Consider exactly the same lending scenario,
and assume that the loan terminates after five years at a point
at which the property value has not changed from its initial $500,000.
In such case, mechanically applying the Dynamic LTV in accordance
with an exemplary embodiment of the present invention provides the
terminal LTV at the end of the five years as, L(5)=20e.sup.0.2.apprxeq.24.4.
Thus, the amount due to the lender is 24.4% of $500,000, which is
approximately $122,000 (i.e., $22,000 more than was originally borrowed).
[0058] Example V: Again, the same scenario is provided, but the
loan terminates after five years at a point at which the property
value has fallen by 20%, i.e., to $400,000. In such case, the amount
due to the lender is 24.4% of $500,000, which is approximately $97,600.
The fact that the amount due at termination is below that at initiation
illustrates one of the novel aspects of the exemplary embodiment
of the model according to the present invention. Indeed, according
to an exemplary scenario that utilizes the present invention, the
interest rate does not always have to be positive, since is factored
off the price of housing, which cannot be guaranteed to increase.
[0059] H. Incorporating Upper Bound
[0060] While the exemplary embodiment of the model in accordance
with the present invention can apply without changing simple settings,
there are certain cases in which the growth over time in the share
due to the lender may be considered as excessive unless a bound
or limit is placed on its growth. It may be beneficial for the homeowner
to maintain a significant interest in the final sale price of the
home. This additional optional feature according to the present
invention would allow the monitoring and compliance costs to be
reduced, since the incentives of the lender and borrower are so
strongly aligned to increase the value of the property. For this
exemplary reason, the exemplary dynamic LTV model according to the
present invention may also include the use of a limit on the proportion
due to the lender. In order to ensure that this gap is not breached
in normal circumstances, an upper bound or limit may be placed on
the initial LTV that can depend on the term of the loan and the
usage of funds value or the rental replacement rate to ensure that
the limit does not lead to a major diminution in the returns to
the lender.
[0061] For example, in one exemplary embodiment of the present
invention, the upper bound can be specified as 49% of the loan amount.
The exemplary Dynamic LTV model in such case provides that there
is constant rate of growth in the LTV on the loan that is capped
as soon as it would otherwise overstep the upper limit of 49%. Complementary
bounds on the initial LTVs can be set to confirm that the 49% upper
bound is overstepped only toward the very end of the loan's termination
date. A model which uses a formula L.sup.U(0)(H,M,R.sup.V,u) can
be used to specify the upper bound or limit on the initial LTV on
the exemplary embodiment of the loan in accordance with the present
invention with a preferred habitat H, the maximum term M, that depends
also on the usage of funds or rental replacement rate vector R.sup.V,
and an unpredictability compensation fee u.
[0062] I. Use of Usage of Funds or Rental Replacement Rate to Influence
Term
[0063] Some of the conventional shared equity mortgages are generally
open-ended. The exemplary dynamic LTV model in accordance with the
present invention allows for the development of a more variable
and flexible set of termination options that may be valuable in
a market development efforts. This is likely because, incentives
may be provided to the borrowers to make decisions that assist investors
in predicting product terms, as shall be described in further details
herein.
[0064] For example, FIG. 3 shows an exemplary embodiment of a process
according to the present invention for enabling the borrower to
self-select a loan that is most desirable thereto according to the
types of available equity-shared loans. As shown, prior to submitting
a loan application, the asset (e.g., property) owner 300, reviews
the available loan types 340 (e.g., in step 310). The available
loan types 340 and their terms are recorded in a database 370. Using
a determiner 380, the loan type 340 and associated terms are generated,
e.g., using external information 390, and provided to the asset
owner 300. The asset owner 300 can determine whether to apply for
the presented loans (in step 320) based on the presented and/or
available loan types and their terms. The asset owner 300 would
have the application to decline to submit anything further (in step
350), or selected a particular type of a loan in step 330, based
on the information obtained or provided in an application therefor
360. This information can be recorded in the database 370, and used
by the determiner 380 (e.g., in conjunction with external information
as needed), throughout the remaining processes and in the future.
[0065] As an example of the use of the rental replacement rate
as a pricing instrument to influence term and predictability, various
exemplary embodiments of the present invention can utilize a concept
of a preferred habitat, H, which may be shorter than the maximum
term of the loan, M. For each such product there may be a different
rental replacement rate that varies according to both habitat H
and term M. The borrower who takes out a loan with the preferred
habitat H that is shorter than the maximum term M may have an option
to roll it over until the end of term. However, the exercise of
this option can effectuate an "unpredictability compensation
fee" u>0 (that may be established in the context of the
exemplary Dynamic LTV model) on the amount that was rolled over.
[0066] Example I. A loan in accordance with an exemplary embodiment
of the model of the present invention may have a 5 year preferred
habitat term that includes an automatic option to extend to a 10
year maximum term upon payment of the unpredictability compensation
fee. In this case, for example, for all times before the end of
the five year preferred habitat, the termination LTV likely grows
exponentially at the rate R(5,10), which is the use of funds rate
or the rental replacement rate for the specific loan, with preferred
habitat of 5 years and maximum term of 10 years. However, when the
five years pass, there would likely be an immediate and/or automatic
penalty charged to the borrower which can be defined by the unpredictability
compensation fee. Continuing for this point until the end of the
maximum term of 10 years for the loan, the LTV grows exponentially
at the rate R(10,10), which is the rental replacement rate for the
product with preferred habitat of 10 years and maximum term of 10
years.
[0067] In this context, taking an example in which $100,000 loan
is provided that utilizes an exemplary model in accordance with
the present invention on a property that is originally valued at
$500,000. For example, this loan may have the following model characteristics
(H,M)=(5,10). In addition that R(5,10)=0.04, R(10,10)=0.05, and
u=0.05. If the mortgage terminates after precisely 5 years, the
model uses a formal which is substantially similar to the formal
described herein above, i.e., by using the numbers therein of L(5)=20e.sup.0.2.apprxeq.24.4.
In an alternative scenario in which the loan on the property is
terminated after 10 years when the property value is $1,125,000.
[0068] In this exemplary case, the appropriate exemplary model
in accordance with the present invention can involve three charges,
and the exemplary model can be implemented as follows to provide
the repayment result for the loan, i.e., L(10)=20. e.sup.0.2+0.05+0.25=20.e.sup.0.5.apprxeq.33.
The first term with respect to the exponent (i.e., 0.2) corresponds
to 5 years of the usage of funds or rental replacement rate charged
at R(5,10). The second term provided at the exponent (i.e., 0.05)
is the unpredictability compensation fee. The final term with respect
to the exponent (i.e., 0.25) corresponds to 5 years of the usage
of funds or rental replacement rate charged at R (10,10). Therefor,
the overall repayment on the loan can be determined to be approximately
33% of $1,125,000, which is approximately $374,000.
[0069] J. Repayment Beyond Term
[0070] It may be beneficial to provide incentives to the borrowers
to repay the loans promptly at point of the termination of the respective
loans. The usage of funds rate or the rental replacement rate can
allow shared-equity loan provider to provide incentives for a rapid
termination using a LTV penalty in accordance with the exemplary
embodiment of the present invention. For example, the loans can
become due at the moment (or time period) that the maximum term
M is reached. However, there may be cases in which a short settlement
period is preferred in order for the funds to be repaid. For example,
this may be the case when the property passes to estate at the time
that its maximum term is reached, and there is a preference for
a period of 12 months to arrive at the settlement of the loan. Such
extensions can trigger an unpredictability compensation charge,
in addition to continuing to draw various charges according to a
pre-defined usage of funds or rental replacement rate. In addition,
in such cases in which there is an extension beyond the term of
the loan, the usage of funds rate or the rental replacement rate
can continue at the rate at which it was last charged until the
point of the termination of the loan.
[0071] As an example, provided below is a description of how the
exemplary embodiment of the model in accordance with the present
invention operates in conjunction with the terminal LTV at any time
T>M. For example, to determine the payoff in the terminal LTV
in this case can take several steps, as shown in an exemplary flow
diagram of FIG. 6 illustrating this exemplary process according
to the present invention. First, in step 610, for the given preferred
habitat and a maximum term (H,M), the loan utilizing the exemplary
model of the present invention determines the LTV at the maximum
term as set forth herein above. At that point, the unpredictability
compensation fee is charged (step 620), and LTV growth in the period
between the end of maximum term and actual termination is determined
according to the rental replacement rate in use at maximum term
(step 630). In addition, the 49% upper bound on the LTV is waived
after termination (step 640).
[0072] To illustrate these exemplary principles of the present
invention, consider again the $100,000 loan which utilizes the exemplary
model according to the present invention on a $500,000 property,
with (H,M)=(5,10), and in addition that R(5,10)=0.04, that R(10,10)=0.05
and that u=0.05. For example, the borrower extends 2 year over the
term, and terminates the loan after 12 years, at which point the
property still has value of $1,250,000. In this case, it is possible
to add the unpredictability compensation fee of 0.05, and two years
additional usage of funds/rental replacement rate at R(10,10)=0.05
to arrive at L(12)=20e.sup.0.5+0.05+0.1.apprxeq.38.3. Hence, the
repayment on the loan would be approximately $479,000.
[0073] K. Multi-Draw
[0074] The flexibility provided by the usage of funds/rental replacement
rate can enable the lenders that provide shared equity loan products
to offer the borrowers various beneficial options. For example,
it is possible to allow the borrowers who do not have need immediately
for all of the funds that they have the right to borrow to retain
an unused balance, on which they would not be charged the rental
replacement rate. As an example, consider a borrower who takes out
a share-equity loan in accordance with the present invention larger
than is needed for the first drawing of the capital. In this case,
the exemplary model described above for the final LTV can be used
to characterize the prepayment due on the actual drawn part of the
mortgage. It is them possible to add back in the un-drawn portion
of the loan to obtain the overall terminal LTV. Further, at some
time t>0, an additional withdrawal is obtained (e.g., borrowed).
The incremental LTV can be determined using the initial property
value. It is also possible to iterate the above exemplary procedure
when there are multiple uses of the multi-draw capability. This
feature could be used in products which provider for a regular payment
or series of payments (for example, monthly) to the homeowner or
the homeowner's nominee to create a recurrent payment schedule,
which in its operation, would resemble an annuity, but draw upon
the equity value of the home (and therefore is distinctive from
reverse mortgage products).
[0075] Consider again the example above with a $100,000 loan on
a $500,000 property, and with R=0.04. Suppose, in the present example,
that only $50,000 of the $100,000 loan is drawn on the mortgage
on initiation, while the remainder is left undrawn throughout the
life of the loan (which terminates in year 5) at which time the
property is worth $750,000. In this case, the LTV on the 10% portion
of the loan withdrawn terminates at 10e.sup.0.2.apprxeq.12.2. Adding
back to the undrawn portion of the loan produces the overall terminal
LTV of 22.2.
[0076] L. Strap-On Charges
[0077] As one example of the model in accordance with the present
invention, there are various strap-on charges that may have to be
placed on shared equity mortgages during the life of the loan (e.g.
paying for the property insurance due to a failure of the borrower
to pay for such insurance). It is possible to impose strap-on charges
which would likely have various implications for the payoff model.
In one exemplary embodiment of the present invention, the final
payoff on the value-based portion of the loan can be globally capped
at 49% of the value of the property. The strap-on charges, however,
may lie completely outside this upper bound/limit, and can result
in the loan terms (including the upper bound/limit) being breached.
Suppose, e.g., that the strap-on charge in dollar amount S(t) is
made at time t. This and all subsequent such payments can be treated
as adding a new component to the share of the property according
to the valuation that is assigned to the property at that time using
the procedures used to determine the value in the cases of scheduled
prepayments (e.g., but without the adjustment based on the need
to recover the initial value in the case of the prepayments). For
the first and any subsequent strap-on, the LTV of the strap-on charge
itself at the point of making the charge can be easily determined.
From that point forward, the LTV on the portion of the loan can
grow at precisely the contractually specified rate on the loan itself,
and can incur also the unpredictability compensation charge of the
remainder of the debt. However, the strap-on additional charges
to the LTV are likely provided completely entirely outside the 49%
upper bound/limit aspect of the model, and are generally not included
in determining whether or not the limit has been reached.
[0078] Further, e.g., suppose that a single additional charge of
$2,000 was placed on the property which was most recently appraised
as being worth $200,000. In this exemplary case, the additional
charge may be treated as if an additional loan of 1% of the property
value was made at the corresponding date, and the final share on
this addition grows continuously at the applicable usage of funds/rental
replacement rate for the ensuing period prior to the termination
of the loan. The growth in the strap-on charge may continue indefinitely,
even if the maximum (upper bound/limit) of 49% is reached and surpassed.
Indeed, the 49% upper bound rule may likely apply only to the initial
loan.
[0079] The impact of strap-on charges on the LTV can also be used
to monitor the LTV over and above the standard 49% upper bound/limit.
The role of the 49% upper bound/limit on the lender's share of the
property price is to ensure that the incentives of the lenders and
borrowers align. If there are excessive strap-on charges, it may
not only threaten this alignment of interest, but also can suggest
a pattern of neglect of the contract terms. Thus, the termination
events may be defined based on the share of the strap-on charges
owned to the lender, and the borrowed amount of the loan rising
above the upper bound/limit. In one example, the total limit on
the repayment of the loan can be 59% of the property value, e.g.,
inclusive of all strap-on charges.
[0080] The exemplary process of property valuation at a point when
the strap-on charge is made is described below.
[0081] M. Prepayments--Scheduled and Otherwise
[0082] It is also possible to divide prepayments of the outstanding
loan into scheduled and over-schedule quantities in accordance with
another exemplary embodiment of the present invention, which is
used with the exemplary model according to the present invention.
To describe this exemplary embodiment, an example is provided below
in which 15% of the outstanding debt (as determine) is used to ascertained
the amount that needs to be repaid in each period according to the
schedule.
[0083] 1. Computing LTV Impact on Scheduled Prepayments
[0084] According to an exemplary embodiment of the present invention,
one of the reasons to provide a scheduled prepayment is to instantaneously
lower the LTV on the loan by a certain adjustment factor that can
depend on the amount prepaid, and the price that the lender charges
to pay off each LTV unit. Once this once-off adjustment is made
at the point of the prepayment, the LTV on the loan can resume its
growth according to the standard rental replacement rate schedule.
Consider a prepayment at time t prior to the termination (as with
the termination time, t is measured continuously in years rounded,
starting with t=0 at the point at which the mortgage is initiated).
In order to calculate the total debt outstanding at this time for
the loan, the first computation is the LTV on the loan at this point.
[0085] This LTV can be determine using the Dynamic LTV model in
accordance with the present invention as if the mortgage was being
terminated at that time. However, in one exemplary variant of the
present invention, the model may not accept value-based losses at
point of the prepayment of the loan. Therefore, the total debt D(t)
as determined at a point of the prepayment as the LTV at that time,
L(t), is multiplied by the maximum of the property valuation at
date t, and the initial value of the property. The impact on the
LTV (at time t) of the prepayment at time t of dollar amount PP(t)
is to produce a downward adjustment in the LTV at time t of .delta.(t),
which can be defined as the ratio of the prepayment to the total
debt .delta.(t)=PP(t)/D(t). There is generally no difference in
the cases in which there is more than one prepayment. The only difference
may be that it is possible to repeat the above procedure for determining
the ratio of prepayment to debt for each prepayment that has been
made.
[0086] As an example, consider the simplest case of all in terms
of the parameters of the mortgage that used the exemplary model
according to the present invention. In particular, for a $100,000
loan may be taken for a $500,000 property, and thus L (0)=20. In
this example, there may be a fixed usage of funds/rental replacement
rate R=0.04 on such loan throughout the term thereof, which extends
for more than 10 years. Suppose that a prepayment for the loan is
made in amount of PP(5)=$18,300 in year 5 of the mortgage at a point
at which the value of the property V(5)=$750,000. In this case,
the total debt at this point is determined as D(t).apprxeq.$183,000.
In such case, the downward adjustment in the LTV of .delta.(5) can
be determined as .delta.(5).apprxeq.0.1. Thus, at the time of the
prepayment in year 5, the LTV on the loan is reduced from L(5) as
provided by the previously described exemplary model to its post-prepayment
level L.sub.1(5), L.sub.1(5)=[1-.delta.(5)]L(5)=0.9 L(5).
[0087] Consider the same case as described above, such that the
property has an initial value V(0)=$500,000, with L (0)=20, and
with R=0.04. Suppose again that the prepayment is made in amount
of PP(5)=$18,300 in year 5 of the loan. However, further assume
that the value of the property has fallen to V(5)=$250,000. Because
there are no losses allowed at the point of the prepayment, the
actual total debt for purposes of prepayment is determined from
the property value at its initial level, rather than at its reduced
level as in year 5. Therefor, the total debt at this point is determined
to be 24.4% of $500,000, and thus, D(t).apprxeq.$122,000. In this
case, the downward adjustment in the LTV of .delta.(5) can be determined
as .delta.(5).apprxeq.0.15. For example, this can be the maximum
level for the scheduled prepayment. Therefore, at the time of the
prepayment in period 5, the LTV on the loan is reduced from L(5)
as given by the standard loan utilizing the exemplary model of the
present invention to its post-prepayment level L.sub.1(S), L.sub.1(5)=[1-.delta.(5)]L(5)=0.85
L(5).
[0088] 2. Adjusting Payoff Formula for Scheduled Prepayments
[0089] According to one exemplary embodiment of the present invention,
the LTV can be adjust by the scheduled prepayment by performing
a post-prepayment imputation of the initial LTV as [1-.delta.(t)]
times the actual initial LTV. To determine the final LTV, it is
possible to utilize the above-described Dynamic LTV model along
with the post-prepayment imputation of the initial LTV, instead
of the actual initial LTV.
[0090] Consider the loan with L(0)=20 and R=0.04, with the prepayment
adjustment of .delta.(5)=0.1 in year 5. In this case, the post-prepayment
imputation of the initial LTV is therefore 0.9 (20)=18. Further,
assume that the loan terminates in year 10 at which 0.4 point the
property is worth $1,125,000. In this case, the terminal LTV is
L(10)=18e.sup.0.4.apprxeq.26.8. Given that the terminal value of
the property is $1,125,000, the amount due to the lender is approximately
$301,000.
[0091] Consider the same loan with L(0)=20 and R=0.04, but with
the prepayment adjustment of .delta.(5)=0.15 in year 5. The post-prepayment
imputation of the initial LTV is therefore as 0.85 (20)=17. If the
loan terminates in year 10 (at which point the property is worth
$1,125,000), the terminal LTV L(10) is as follows, L(10)=17e.sup.0.4.apprxeq.25.3.
[0092] 3. Above Schedule Prepayments
[0093] The above exemplary procedures are generally utilized for
the prepayment that lies above schedule. However, there may be an
additional charge that can be defined by the unpredictability compensation
fee on all such above schedule payments. This means that a given
dollar of above schedule prepayment may have a smaller proportionate
impact on the LTV than would be the case for the equivalent below
schedule prepayment.
[0094] To converts this scenario into the exemplary model according
to the present invention, a prepayment at time t prior to the termination
should be considered. As described above, the total debt D(t) at
this point can be determined as the LTV at that time L(t), multiplied
by the maximum of the valuation at date t, and the initial value
of the property. For a prepayment at time t of the dollar amount
PP(t), with PP(t)>0.15 D(t), a portion of the prepayment would
lie above the schedule. In this case, it is possible to first determine
the downward adjustment .delta..sub.S(t)=0.15 corresponding to the
LTV change on the portion of the prepayment that was scheduled.
Beyond this situation, a second downward adjustment can be made
in the LTV in fractional amount .delta..sub.i(t), where the subscript
I indicates that this is an incremental prepayment that lies above
the schedule.
[0095] To determine this downward adjustment, it is possible to
first charge the borrower an unpredictability compensation fee of
u on the money, dividing the incremental prepayment [PP(t)-0.15
D(t)] by [1+u] to arrive at the effective incremental prepayment.
It is them possible to divide this result by D(t) to arrive at the
downward adjustment in the LTV due to the incremental prepayment
.delta..sub.I(t). Further, it is possible to adds the scheduled
and incremental downward adjustment to the LTV so as to obtain the
overall adjustment factor .delta.(t)=.delta..sub.I(t)+.delta..sub.S(t).
To determine the LTV of any loan at payoff when the above-schedule
prepayment has been effectuated, it is possible to multiply the
actual initial LTV by [1-.delta.(t)], and thereafter apply the previously
described exemplary Dynamic LTV model.
[0096] Consider the same example as described above, with the property
with initial value V(0)=$500,000, L(0)=20, and R=0.04. For example,
the prepayment was made in the amount of PP(5)=$36,600 in year 5
of the loan at which point the value of the property is V(5)=$750,000.
With a total debt D(5) determined at this point as $183,000, only
15% of this amount, or $27,450, can be counted on the schedule.
Hence the incremental prepayment amount is $9,150. If the unpredictability
compensation fee is determined in proportionate terms as u=0.1,
this can mean that the effective incremental prepayment is [100/110]
$9,150, which is approximately $8,240. Hence the downward adjustment
in the LTV due to the incremental prepayment is .delta..sub.I(t)=8,240/183,00
which is approximately 4.5%. Hence the overall downward adjustment
to the LTV due to prepayment .delta.(5) is about 19.5%. Therefore,
at the time of the prepayment in period 5, the total LTV on the
loan can be reduced from L(5) as provided by the previously described
exemplary model according to the present invention to its post-prepayment
level L.sup.1(5), as follows: L.sub.1(5)=[1-.delta.(5)]L(5)=0.805
L(5).
[0097] Using the same example, the amount that would need to be
prepaid in year 5 to payoff the entire outstanding debt is reviewed.
The determination of D(t) as being $183,000 gives rise to a maximum
scheduled prepayment of $24,450, as indicated above. In order to
prepay the remaining 85% of the debt outstanding would preferably
utilize a payment of the unpredictability compensation fee on all
incremental prepayments. Therefore, an effective incremental prepayment
in amount of $158,550 should be then made. Given that u=0.05, the
actual prepayment should be [110/100]$158,550=$174,400 in order
to arrive at .delta.(5)=1, thus reducing all subsequent debt to
zero.
[0098] N. High LTV Dynamic Payoff Model
[0099] It is possible to utilize another exemplary embodiment of
the present invention in cases where standard mortgages outstanding
on the property, by providing the exemplary shared equity loans
together or in addition therewith. The LTV on the total loan package
inclusive of the shared-equity loans can be relatively high, and
thus there may be a risk of default to be considered. The of the
object of this exemplary embodiment of the present invention is
to enhance the safety the borrower, the other lenders, and the shared-equity
lender by reducing the incentive for the borrower to default. As
the above-described examples illustrate, the shared-equity loans
according to the present invention may have valuable insurance features,
since the lender shares certain amount of the risk of falling property
prices with the borrower. According to this exemplary embodiment
of the present invention, this risk may be reduced so as to benefit
all market participants.
[0100] An example of such enhancement provided by such exemplary
embodiment is provided, e.g., for products with sufficiently high
LTV on all loans, shared-equity and conventional. In particular,
the basic payout formula can include an additional insurance for
the borrower in the case of losses. Such insurance may be attractive
to borrowers not only because it brings them direct monetary benefits,
but also due to impact in lowering default incentives, and therefore
enabling the borrowers to preserve their good record in the credit
markets. The high LTV cases use the previously described Dynamic
LTV model in accordance to the present invention which defines the
LTV at termination. Moreover the payoff formula according to the
present invention described above can be used for the property that
is valued at least as highly at termination as at point of issuance.
However this determination of the amount due may be adjusted down
in the case of loss. Specifically, the amount due is what would
have been due in the case of no price change, less 50% of any losses
(subject to the debt remaining always non-negative). However, the
investor value is maintained by the availability of the insurance,
incremental or otherwise, on the loan that used the exemplary model
of the present invention, would likely not apply to the prepayments
that were made during the term of the mortgage.
[0101] To illustrate the use of this further exemplary embodiment
of the model according to the present invention, consider the loss
case that was described above. With the $100,000 loan at constant
rental replacement rate R=0.04 is obtained, and the property value
falls from $500,000 in year 0 to $400,000 at termination in year
5. Suppose that all of the funds are drawn immediately, that there
are no strap-on charges and no prepayments were made. However, further
assume that in addition to the $100,000 loan in accordance with
the present invention, the borrower took out in year 0 a standard
mortgage in amount of $350,000 on the property. In this case, the
total initial LTV is 90%. In the standard Dynamic Payoff model,
the amount due to the lender would have been 24.4% of $500,000,
which is approximately $97,600.
[0102] Using the exemplary high LTV formula in accordance with
the present invention, the final payoff is defined by starting with
24.4% of the initial property value of $500,000, and then subtracting
$50,000 therefrom to account for the equal sharing of losses. Hence
the total repayment would be in the order of $72,000. The additional
insurance of more than $25,000 not only greatly assists the borrower
in a time of need, but also greatly lowers the incentive to default.
[0103] 1. Minimum Borrowing Amounts with High LTV Model
[0104] There may be other variants of the High LTV model to enable
a smoothly functioning market with all parties benefiting from the
risk reduction. For example, when the total LTV on all loans is
above a threshold such as 75%, there may be a minimum initial LTV
on the equity-shared portion of the second mortgage. The actual
limits can be structured such that the borrower with the total LTV
of 80 may have the equity-shared share in at least 20% of losses,
so that it will take a 25% fall in property prices to induce negative
equity, similarly to a standard equity-based loan in accordance
with the present invention with the LTV of 75. In addition, the
borrower with the LTV of 85 may have the equity-based share in at
least 25% of the losses, so that the default incentives can mimic
those of an individual with the equity-shared mortgage of the LTV
80. Another change may be implemented by setting additional up-front
costs associated with the use of the equity-shared loans according
to the present invention in the high LTV context. It is possible
to set the following charges in relation to the total financial
package at the initiation of the loan, e.g., adding a fixed high
LTV fee as a percentage of the total amount borrowed with all loans
that depends on the total assessed LTV at the time of the initiation
thereof.
[0105] O. Additional Features of Model
[0106] Setting rental replacement rate: A function can be implemented
to determine the history of market rents, property prices, mortgage
rates, and rental replacement rates, which can be used can be used
to determine the current rental replacement rate in a given loan
and/or housing market. Hence, the rental replacement rate in different
times and locations can vary according to market conditions and
past history. The current rental replacement rate may vary over
time according to market conditions.
[0107] Customer Heterogeneity: There will be some customers whose
financial history and prospects will make them more attractive than
the typical borrower to the lenders which provide loans utilizing
the exemplary embodiments of the models in accordance with the present
invention, while other borrowers may be less attractive. The exemplary
embodiment of the system and process according to the present invention
is capable of rejecting certain customers with unsuitable history
and prospects, e.g., based on a customer score, and capable of adjusting
the pattern of pricing based on this score.
II. Prepayment, Repayment and Other Procedures
[0108] Using the exemplary embodiments of the models according
to the present invention enable other related issues and concerns
to be addressed. For example, the borrowers attempt to obtain low
valuations at the time of the prepayment in order to take at least
some of the value away from the lenders. Further exemplary embodiments
of the present invention are described below to reduce this possible
behavior.
[0109] A. No Prepayment Close to Sale
[0110] There may be situation where the borrowers with significantly
higher than pool-average rates of property price appreciation may
prefer to prepay as much of the repayment amount as possible immediately
prior to the sale of the property, or make such prepayment immediately
before undertaking value-enhancing measures. For this reason, a
further exemplary embodiment of the model according to the present
invention prevents any prepayment of the loan once a notice of sale
or termination has been provided, or within a predetermined time
period (e.g., 6 months) from the end of the term/termination of
the loan.
[0111] B. Valuation of Property at Prepayment
[0112] The following exemplary procedures according to the present
invention can be used to determine the value of the property at
the point of prepayment.
[0113] Procedure 1; For complete payoffs, the borrower submits
an appraisal fee, and this appraisal determines the valuation of
the property, subject to an "as is" adjustment. The borrowers
of the loans that utilize the exemplary embodiments of the models
in accordance with the present invention may be required to maintain
their properties in "as is" condition. Reductions in value
of the property due to neglects of this requirement are disallowed
in the valuation calculation.
[0114] Procedure 2: For scheduled prepayments (i.e. up to 15% of
the prepayment amount), the valuation assessed to any given property
at a point of the prepayment may be an index-based assessed rate
of growth in the value of the asset (e.g., property) since the respective
asset was last valued. There are several steps involved in the actual
computation, as shown in FIG. 7.
[0115] For example, when an application is submitted for a prepayment,
the date of the last valuation of the property is noted, together
with its value at that date (step 710). The loan process that uses
the exemplary embodiment of the model in accordance with the present
invention can fix a long run and publicly trusted set of quarterly
property price indices, such as ABS indices for capital cities,
and each loan is assigned to the capital city of the state in which
it is located (step 720). The proportionate change in the assigned
index over the period since the last valuation is determined (step
730). An interpolation process can be used to estimate the actual
growth rate in the index over the corresponding period, given that
there is unlikely to be an exact coincidence between the period
relevant to the given property and the quarters that define the
price index (step 740).
[0116] Further, a numerical adjustment can be made to the rate
of growth in the index based on differences in performance between
the assets (e.g., loans) that utilize the exemplary model as a whole
and the underlying rates of statistically measured property price
appreciation in all cities, states and locations taken as a whole
(step 750). This adjustment factor can be derived from valuations.
It is possible for the exemplary model of the present invention
to appraise the properties in the order of 10% of the properties.
Each such loan associated with the appraisal will have a predicted
rate of the property price increase since initiation based on its
city, state and/or location assignment, and this will be subtracted
from the actual measured rate of appreciation. Averaging this in
a defined manner across the pool can provide various adjustments
that may be added to all properties, regardless of location.
[0117] The current estimated index-based value of the property
will be determined by multiplying the last value of the property
by the proportionate change in the relevant property price index
over the appropriate period corrected for the adjustment factor
(step 760). To discourage prepayments based on the pool appreciation
being below that on the owned home, the exemplary embodiment of
the present invention can identify additional appraisals for the
properties that have paid off, e.g., twice in the last four years
(step 770).
[0118] C. Initiation Procedures
[0119] According to another exemplary embodiment of the present
invention, if there is a market transaction, then the initial valuation
may be the lower of the purchase price less all fees and expenses,
and the appraised value. If there is no market transaction, the
initial value is set at 95% of the appraised value to guard against
an adverse selection, whereby those who are over-valued have a greater
incentive to use the finance. As a further safeguard against the
adverse selection when there has been no market transaction, the
borrowers can be requested to attest in writing that they have not
commissioned other appraisals in the last 2 years, except in the
situation in which full reports of the appraisals have bee provided
to the lenders.
[0120] In addition, the borrowers may be requested to attest that
they have not applied for other value dependent mortgages, and if
they have, they must provide the terms on which the borrowers were
offered such loan products. Once the borrower applies for one or
more loans that utilize the exemplary embodiments of the model in
accordance with the present invention, the borrower may have a specified
time window in which to complete an application for such specific
loan product, and pay the associated application fees. At that time,
the lender may be required to provide the funds on the agreed terms
within a further specified time window. However, the application
for funds is not filed by the borrower or received by the lender
in the specified time window, the offer can be voided, and any new
application may require a new valuation. It is possible to set a
minimum time between successive applications of 2 years to prevent
the property hold "trawling" for the appraisals.
[0121] D. Terminal Valuation
[0122] A contract for the loan can specify a notification period
of any length prior to the sale of the property, and it should provide
that an appraiser must be granted entry. If no notice is received
by the lender, an appraisal can be effectuated in the time window
of 6-12 weeks prior to the termination. The actual termination date
can proceed after such final valuation. After such valuation, the
borrower may be provided with a statement of the amount due to the
lender at the termination, and can obtain additional information
to determine additional costs should the repayment be delayed. If
the valuation is precluded for any reason that is the fault of the
borrower, then the valuation can be set at 110% of estimated valuation
obtained by the lender or a third party. If there is then a sale
of the property, the seller or seller's representative should notify
the lenders. At that point, the final value of the property can
be obtained, which can be established as the maximum of the appraised
value and the price after subtraction of all fees. The, the borrower
would be notified of the final payoff amount.
[0123] Instead of the full appraisal, it is possible to compare
the gross sale price of the property before all fees and expenses
with a desk valuation, and request a report (e.g. an auction report)
to indicate that the sale was at arms length. If the report is irregular,
or if the property sells for an amount, e.g., 5% below market value
of similar properties, an actual valuation can be performed by the
lender, e.g., within 2 days of the receipt of the report.
[0124] If the property is put on the market but does not sell within
a pre-specified window, payoff would not have to be made. However,
at this point, a fee may be charged for all costs incurred in the
sale process. The contract will incorporate a clause that specifies
that should the property be sold within a certain window, the lender
may have the right to treat the payoff value as the maximum of the
appraised value at the earlier point and the gross sale price of
the property before all fees and expenses.
[0125] E. Termination Through Loss of Owner Occupation
[0126] In accordance with another exemplary embodiment of the present
invention, the loans associated with the equity-shared model in
accordance with the present invention may prefer the borrower to
maintain the occupation of the property (e.g., occupancy for at
least 180 days a year). Upon leaving this status (e.g. switching
to a secondary home status), the borrower may be requested to inform
the lender, whereupon the standard valuation-based termination process
may be initiated.
III. Enhancing Predictability
[0127] It may be preferable to provide the investors in pooled
debt interests with reassurance that the borrowers will likely behave
in a predictable manner, and will not hold on to the mortgages for
an unduly long time. Thus, it may be beneficial for the borrowers
on various loans to be induced to provide information regarding,
e.g., predictable timing of payoff of the loans, and preventing
unpredictable payoffs of the loans to reduce the profits that may
be due to the investors. The likelihood or predictability of payoffs
will be enhanced by the contractual terms of the mortgage, which
give effect to some or all of the features described in the examples
(e.g., calculation of terminal value), and by the manner of disclosure
of those terms to the borrower (e.g., scenarios of terminal value
at the maturity date). The predictability will be further advanced
by the education of borrowers through the systems for mortgage origination
and the disclosures made prior to the loan.
[0128] Further exemplary embodiments of the models of the present
invention are capable of adding to the predictability of holding
periods of the loans that utilize such models, which can be applied
to the shared-equity loan markets and loans, as well as to other
loan products and installment debt products. For example, the investors
can derive additional stability by knowing when they will receive
the returns on their investment, and that the amounts are maximized.
Indeed, providing the investors with the predictability of the payoff
dates, pricing models in accordance with the present invention can
be designed to ensure that borrowers who are likely to pay off in
a particular period have an incentive to borrow using a particular
loan that is priced to offer the lowest price in return for providing
this precise time window of repayment.
[0129] A. Uncertain Payoff Times on Securitized Debt Instruments
[0130] In asset markets, debts of all forms are generally securitized,
and interests in the debt payments can be sold to the investors.
Some of such markets are mortgage backed securities that are sold
on the secondary mortgage markets. These are the markets in which
standard interest paying mortgages are generally sold onto a broader
class of the investors, with various enhancements such as pool insurance
to provide reassurances to certain nervous investors. In valuating
these financial instruments, one of the risks may concern the timing
of payouts, which can have a significant influence on the value
of such instruments. In the case of the mortgage backed securities,
these risks may arise both due to the uncertainty concerning the
timing of refinancing induced prepayments, and the uncertainty concerning
turnover times on the underlying properties.
[0131] In a thickly traded market such as that in conforming mortgage
securities, refinancing induced prepayment risk may be one of the
dominant concerns due to its direct impact on the values of the
assets. However, even for the debts in which this form of risk is
not very significant, the timing of payoffs to the investors may
be highly uncertain. For example, when conforming thirty year mortgages
issued at historically low interest rates are sold into the market,
the risk may arise not necessarily from the prepayments induced
by refinancing (which are likely to be minimal), but rather from
the reductions in the debt due to an influx of money, or sale of
the home. Currently, such uncertainty is not really addressed. Indeed,
there has been likely no discussion as to the introduction of incentives
that might give rise to a more predictable pattern of payoffs.
[0132] B. Why Uncertain Payoff Times Reduce Asset Values
[0133] Many investors in asset-backed securities may be interested
in assurances not only on the amount of money that their investment
will ultimately produce, but also on when this money will be realized.
In the case of the SAMs issued by the Bank of Scotland, it is the
unpredictable timing of payouts that may result in the need to produce
a hybrid instrument in which a predictable flow of interest from
the standard mortgage was overlaid on top of the payoffs on the
SAMs. The benefits of having the predictability is particularly
acute in relatively non-liquid asset markets, in which the need
to quickly raise funds in certain times may result in the investor
taking a significant loss.
[0134] C. Enhancement Predictability of Payoff Times
[0135] There may be at least three areas addressed by exemplary
embodiments of the models of the present invention to enhance the
payoff predictability of debt instruments, e.g., (i) product pricing,
(ii) customer matching, and (iii) setting of asset manager incentives,
which can be applied to shared equity mortgages/loans as well as
to conventional mortgages/loans.
[0136] 1. Self Selection and Preferred Habitat
[0137] For example, the borrowers can provide a relatively inexpensive
access to funds if they terminate within a relatively short horizon
(their "preferred habitat"), yet offering these borrowers
the option to extend beyond this period should they have a need
for the funds that lasts longer than they initially expect.
[0138] 2. Nominating a Preferred Termination Window
[0139] Given the importance of predictability to the investors,
another pricing model with respect to borrowing instruments offers
the customers the right to select, e.g., a 12 month period during
which they may be offered a discount on the borrowing costs. For
example, the borrowers who are confident of the specific short period
(e.g., several months, one year, etc. in duration) in which they
anticipate terminating the loan, will have the right to specify
exactly this time period at the contract/loan initiation. The borrowers
would then receive a discount should they terminate the loan within
their specified window. Otherwise, they would be subjected to a
surcharge if they miss the time window.
[0140] 3. Unpredictability Compensation Fees
[0141] The lenders may wish to understand and influence the termination
behavior not only at the point of application for the loan, but
also during the later life of the loan. Various unpredictability
fees may be important to this goal not only in the equity-sharing
loan product setting, but also for other loans in which the predictability
of tenure is important.
[0142] D. Self Selection and Preferred Habitat
[0143] In the context of shared-equity loans which utilize the
exemplary model in accordance with the present invention (e.g.,
the Dynamic LTV model), the preferred habitat H that may be shorter
than the maximum term M. The borrower who takes out a loan product
with the preferred habitat H shorter than maximum term M may be
provided the automatic option to roll it over until the end of term.
However, the exercise of this option can be costly for the investors,
since it makes the time path of payoffs significantly harder to
predict, and may impose various costs on the investors as a result
of the mismatch between anticipated and actual timing of the payoffs.
Therefore, any borrower who wishes to exercise the option may have
to pay a standard "unpredictability compensation fee"
on the amount rolled over, as described herein. By providing that
the rates are set relative to one another in an appropriate fashion,
one can ensure that those who believe that they will terminate within
a given period select the loan instrument that is highly revealing
of this tenure expectation to the market as a whole. Further, by
allowing for a longer maximum habitat, the borrower who is uncertain
about the tenure is able to produce some insurance against surprises.
[0144] 1. Exemplary Embodiment
[0145] In the case shared-equity loans which utilize the exemplary
embodiment of the models of the present invention, the term structure
of the usage of funds/rental replacement rates and the unpredictability
compensation fees encourage self selection by the borrowers. The
term structure of interest rates on money is provided in a similar
manner as that for the rental replacement rates, which are analogous
to interest rates on housing services. The term structure is generally
upward sloping to encourage those who wish to terminate in the relatively
near future to select products of relatively short term. It is also
set in such a manner that the (H,M)=(10,10) product is cheaper for
an individual with a high chance of wishing to extend beyond the
five year term, while the (H,M)=(5,10) loan product is expected
to be cheaper for the individual who is more likely to terminate
within 5 years. The example below illustrates how the combination
of rental replacement rates and the unpredictability compensation
fees may be used to encourage self selection at point of application
according to expected holding periods and in addition the level
of uncertainty concerning these holding periods.
[0146] 2. Examples
[0147] Consider the standard example above of a $500,000 property
with a $100,000 equity-shared loan which utilizes the exemplary
model of the present invention initiated at time 0. Further consider
a setting in which four different individuals are applying for the
loan. Individual A is sure to terminate in year 4, individual B
is sure to terminate in year 6, individual C believes that termination
in year 4 has probability 0.9 while termination in year 6 has probability
0.1, while individual D believes that the reverse is true, with
probability 0.9 of terminating in year 6, and only a 0.1 probability
of terminating in year 4. Assume that R(5,5)=0.03, R(5,10)=0.04,
that R(10,10)=0.05 and that u=0.1.
[0148] In this case, individual A will reveal short tenure expectations
by selecting the product with (H,M)=(5,5) in which the cost of capital
out to year 4 is lowest, while individual B will reveal long tenure
expectations by picking the product with (H,M)=(10,10) which is
cheaper out to year 6 than the only other product with sufficient
duration, for which the unpredictability compensation fee is excessive.
Individual C has an incentive to pick the product with (H,M)=(5,10),
because there is a 0.9 probability that this will cost significantly
less in the LTV terms than with (H,M)=(10,10), and only a 0.1 probability
of the opposite. Finally, individual D has an incentive to pick
(H,M)=(10,10), because there is a 0.9 probability that this will
cost significantly less in LTV terms than the option (H,M)=(5,10),
and only a 0.1 probability of the opposite end.
[0149] E. Nominating a Preferred Termination Window
[0150] According to another exemplary embodiment of the present
invention, the customers may have the right to select particular
time period (e.g., a 12 month period) during which they may be offered
a discount on the borrowing costs of the loan. The pricing innovation
is that they receive a discount should they hit their specified
window. The cost is that they face a surcharge if they miss the
window. Thus, one of the benefits of this exemplary embodiment is
that it appeals to those borrowers who are confident about the termination
date of the loan that they are selecting. In addition, with a sufficiently
high discount on offer, some may take out the loan product, and
terminate in the window just because of the monetary benefits to
them. This will be of mutual benefit to the lenders and borrowers
given the advantages of the payoff predictability.
[0151] F. Predictability Compensation Fees
[0152] The lenders may wish to understand and influence the termination
behavior of the borrowers, not only at the point of the application
for the loan, but also during the later life of the loan. Various
unpredictability fees may be used to achieve this goal not only
in the equity-sharing mortgage market, but also for other loans
for which predictability of tenure may be important. These apply
to the above-scheduled loan prepayments, and may limit the incentives
for the borrower to prepay during the life of the loan.
[0153] In the shared-equity loan/mortgage context, the investors
may wish to hold to the real estate returns for a predictable period
of time, so that the early termination is costly therefor. At least
for this reason, a schedule of maximum annual prepayment may be
provided such that little or no unpredictability compensation payment
would be needed. The schedule may prevent the prepayments in the
first two years of the mortgage, thereafter specifying that a 15%
share of the outstanding mortgage can be prepaid in each year. In
any year in which the prepayments are permitted (e.g., after year
2), the borrower will be able to pay off some portion or the whole
loan amount. However, doing so may trigger an unpredictability compensation
fee, e.g., on the 85% of the loan that is above the schedule.
[0154] G. Customer Matching
[0155] In this exemplary embodiment of the present invention, the
borrowers are encouraged to understand which product to select based
on their tenure expectations. With this in mind, yet another exemplary
embodiment of the present invention, it is possible to provide various
information systems, processing arrangement, software products and
models to assist the customers to decide on the option that is best
suited for them. By using such a customer interface which would
provide such computerized assistance, not only will borrowers be
able to identify the best product in light of their expectations,
but they will also be encouraged to provide additional information
that will of value in predicting the expected holding period for
the loan in question.
[0156] In the shared equity mortgage context which utilize the
exemplary models of the present invention, the borrower may be guided
to the best product in light of their tenure probabilities and the
costs they assess to having to terminate prior to the end of the
period during which they would ultimately have liked to hold the
loan. This exemplary model may include and consider not only expectations
concerning the tenure of the loan, but also a penalty function indicating
the cost to the borrower of being forced to terminate the loan earlier
than desired, and a method of incorporating beliefs about the costs
of rolling over short term instruments to arrive at a longer term
solution.
[0157] H. Predictability Incentives for Asset Managers
[0158] To obtain predictable timing, various incentives may be
provided for asset managers to match the tenure of their asset holders
closely with the prediction made at the initiation of the loan process
(or at the loan acceptance) that can match the preferences of the
investors. The exemplary procedure for matching the investor habitat
preferences with those of the borrowers, which can be used the shared
equity mortgage market and other conventional markets, such as the
market for standard mortgage backed securities.
[0159] I. Further Exemplary Embodiments
[0160] It should be understood that the description herein regarding
loans and mortgages for real property which use the exemplary embodiments
of the model in accordance with the present invention also include
any form of investment in the relevant property. Accordingly, where
the term "debt" is used, it will also include any relationship
between the homeowner and the provider of the investment, however
characterized at law or recorded or evidenced, under which a person
(the provider of the investment capital) acquires an interest in
the real property separate from, or in addition to, the homeowner
by way of investment. The term "investment" can mean but
is not limited to any investment in, or exposure to, real property,
whether made by way of or in the form of a loan or other financial
accommodation, or to acquire any equitable or legal interest in
real property, whether that investment is made in the form of a
loan, whether secured by mortgage or not, a joint venture interest,
an account of profits, a partnership interest or as a tenancy in
common in the property.
[0161] In addition, the term "advance" as used herein
can mean, but is not limited to any payment made to a homeowner
by the lender which utilizes the exemplary embodiments of the model
in accordance with the present invention, whether in the nature
of a loan or other financial accommodation or as an investment in
the property.
[0162] In addition, the term "mortgage" as used herein
can mean, but is not limited to any agreement in writing under which
the relationship of the homeowner and the lender described herein
above can be defined in respect of the investment.
[0163] Further, the term "homeowner" as used herein can
mean, but is not limited to the person, persons or other entity/entities
to whom the advance is made, whether the relationship to that person
is one of debtor/creditor or co-owner, partner or joint venturer.
[0164] In accordance with other exemplary embodiments of the present
invention, the exemplary models described herein can be used to
create a true equitable interest in residential real property, in
a form of "investment" suitable for aggregation through
security pools, appropriate for investment products (e.g., may be
different from pools of residential mortgage-backed securities).
In addition, the manner in which the investments would relate to
conventional mortgages is addressed by a further exemplary embodiment
of the present invention in that these investments/loans which utilize
the exemplary model according to the present invention can be marketed,
offered, administered and terminated in conjunction with a conventional
mortgage. Indeed, using such further exemplary model in accordance
with the present invention provides an ability to the homeowner
to switch back and forth between the debt and equity components
of the mortgage. In addition, the pre-payment and multi-draw facility
exemplary features of the loan/investment according to the present
invention an be used in such model, along with the possibility to
use an insurance policy for both mortgage components. Thus, the
risk profile of the loan/investment lender may be reduced, while
applying this reduction to the benefit of the homeowner
[0165] Furthermore, according to yet another exemplary embodiment
of the present invention, a compilation of specific classes of investments,
designated by region, demographics, property value, etc. can be
utilized. This can permit strategies of active management. The pools
can be used for a variety of investment products, both retail and
wholesale. Through the construction of pools, this exemplary embodiment
of the present invention can allow for a variety of manifestations
of the investment return, and providing the ability to manage inter-generational
wealth transfer through an investment platform in accordance with
the present invention.
[0166] The exemplary embodiments of the models according to the
present invention described herein are not applicable to only loans
or debt instruments. For example, these exemplary models can be
used by direct purchasing the equity in the property, and then using
the exemplary models, further transferring the equity interests
thereto over time. In this manner, it is possible for a party making
the investment to increase an equity position to the property over
time.
[0167] The foregoing merely illustrates the principles of the invention.
Various modifications and alterations to the described embodiments
will be apparent to those skilled in the art in view of the teachings
herein. It will thus be appreciated that those skilled in the art
will be able to devise numerous systems, processes, models and arrangements
which, although not explicitly shown or described herein, embody
the principles of the invention and are thus within the spirit and
scope of the invention. It should be understood that the exemplary
embodiments of the models according to the present invention can
be implemented using one or more processing arrangements (e.g.,
personal computers, minicomputers, mainframes, personal digital
assistants, laptops, notebooks, etc.), in software (via coded computer
programs, programmed/hardwired computer instructions, in source
format, object format, machine-code format, etc.) that can be used
to configure the processing arrangement to execute the exemplary
model(s), stored on storage computer-readable medium (e.g., hard
drives, RAMs, ROMs, CD-ROMs, floppy disks, RAIDs, memory sticks,
etc.), or another other device which can store and/or execute the
exemplary models described herein. All publications and references
referred to above are incorporated herein by reference in their
entireties. |