MARKET SHIELD CAPITAL™, LLC NEWS RELEASE
Making Mortgage Payments Affordable and Fair (The HomeShield™ Program)
We've got to...set up a negotiation between banks and borrowers so that people can
stay in their homes… That is going to have an impact on the economy as a whole."
President-Elect Obama on "60 Minutes,” November 16, 2008
South Natick, MA, November 24, 2008. There is urgent discussion today about how to
provide relief to the enormous number of homeowners facing foreclosure because they
cannot afford their payments. Market Shield Capital, LLC announced that it has designed a
home mortgage solution – its HomeShield Program – that optimizes many of the current
approaches, while providing effective protection to homeowners and lenders from the wealth
destruction of foreclosures and short sales. In addition, HomeShield can substantially
reduce the cost of any government program guaranteeing home mortgages.
The purpose of Market Shield’s idea is to provide homeowners payment relief without forcing
lenders to reduce the principal balances of their loans. To accomplish this, the HomeShield
program sets a homeowner-borrower’s net mortgage payment at an affordable level and
then indexes future payments to the metro area change in CPI for rent of primary residence
(an “Affordability Index”), with changes to payments made annually within appropriate
parameters. Thus, payments would always be affordable, and rise only to the extent the
average renter in his metro area is actually paying a higher rent.
The homeowner would continue to own and occupy his home as long as payments were
made, and at maturity would own his home outright. Over the long run, the lender could
recover lost value, but the homeowner would always pay an affordable amount pegged to
the fair value for occupancy, while rebuilding his equity. Thus, by indexing the homeowner’s
payments to a market measure of affordability, equilibrium of fairness is created between the
homeowner and any lender.
To protect homeowners-borrowers’ ability to sell, if the property is sold, the loan could be
assumable. To protect lenders, if the loan is paid off early or defaults, the borrower could
owe the original principal, less amortization, plus any index adjustment increase.
Using the HomeShield technique – adjusting borrowers’ payments with an Affordability Index
- there are several structures under which residential mortgage loans could be modified.
(For an example of a HomeShield structure that can be implemented without participation of
a lender, which may be a securitized pool, see below.). Any number of programs using an
Affordability Index would accomplish the goal of creating fair, affordable mortgage payments,
while permitting lenders to ameliorate returns on “upside-down” mortgage loans.
To the lender, this result is clearly preferable to foreclosure or short sale and would serve to
increase the value of the home loans in its portfolio. To the borrower who is faced with
foreclosure or short sale, the benefits are manifest. If implemented on a widespread basis, a
HomeShield Mortgage program would reduce the cost of government programs for banks,
simplify and reduce the cost of dealing with defaulted mortgage loans and help stabilize
home prices.
Market Shield Capital can work directly with borrowers without the involvement of any third
party to implement one form of its HomeShield solution using its own capital under
management. We will also work with loan servicers, government, GSEs, existing lenders or
subsequent purchasers of loans to create programs using the HomeShield technique.
Background Information
Market Shield Capital, LLC, based in South Natick, MA, develops and commercializes its
proprietary Market Shield™ loans. Market Shield Capital currently has proprietary programs
for single-family residential and multifamily properties and is developing energy loans and
other applications.
Market Shield Capital holds a patent portfolio on the HomeShield structure as well as its
Market Shield loan products and other proprietary technology to assist in the implementation
of HomeShield and Market Shield loan programs.
Allan Weiss, founder of Market Shield Capital and inventor of the HomeShield and Market
Shield structures, was co-founder and CEO of Case Shiller Weiss, developer of the well
known Case-Shiller Home Price Index which CSW first commercialized in an effort to create
home equity insurance and home price futures in the early 1990s. The Case-Shiller index
has become critical to policy makers, including the Federal Reserve Board, enabling them to
make well-informed decisions to help stabilize home prices and protect the economy. The
HomeShield structure is a logical and important next step, allowing investors and borrowers
to use rental indexes to directly protect their investments.
A HomeShield Loan Program from Market Shield Capital
Market Shield offers a residential mortgage program under which it provides a
supplementary loan to the homeowner about equal to the size of the mortgage (additional
amounts could be loaned to cover past due mortgage payments).
The proceeds of this new loan are invested in a certificate of deposit whose interest is used
to help make the monthly mortgage payments on the original mortgage and to repay the
HomeShield loan. Since the HomeShield loan’s future payments are indexed to an
Affordability Index, the homeowner is never faced with an arbitrary increase in payments.
Thus, overall debt payments are reduced until the homeowner can afford a gradual increase
in their payments,
Consider a homeowner who bought a home for $390,000 with a $350,000 mortgage from a
bank at a rate of 8% fixed interest, a property with a current market value of only $300,000,
and a current monthly mortgage payment of $2,568. Assume he can afford $2,073, a
shortfall of $495 per month.
1. HomeShield Loan Set-Up:
• Market Shield lends the homeowner $350,000.
• The homeowner buys a 10-year $350,000 certificate of deposit paying 5% interest.
• Market Shield establishes a security interest in the certificate of deposit.
• Interest on the HomeShield loan is set to 0.0% standard interest plus 3 times the percent change in the Affordability Index.
2. Each Month of Year 1, the:
• Homeowner pays his usual monthly mortgage payment of $2,568, with a subsidy from interest earned on the certificate of deposit.
• $495 of the interest earned from the Certificate of Deposit is used to pay a portion of the $2,568 mortgage payment, so the net payment by the homeowner is $2,073, the level he can afford.
3. At the End of Year 1, the:
• Certificate of deposit has earned interest of $17,500.
• Certificate of deposit has subsidized $5,942 in interest payments to the first lender.
• Certificate of deposit balance plus retained interest of $11,558 ($17,500 - $5,942) (before any payment to Market Shield) is $361,558.
• The Affordability Index has risen 1%, so total interest is 0% plus 1% times three, i.e., 3%. The HomeShield loan balance is therefore increased 3% or $10,500, from $350,000 to $360,500.
• $20,000 from the certificate of deposit is used to reduce the HomeShield loan balance so the HomeShield loan balance is reduced to $340,500 and certificate of deposit balance is reduced to $341,558. This $20,000 payment is the amount necessary to assure that the HomeShield balance declines each year (in order to avoid negative amortization).
4. Each Month of Year 2, the:
• Homeowner pays his usual monthly mortgage payment of $2,568.
• Since the Affordability Index rose 1% last year, the new affordable level of net payment by the borrower is increased 1% from $2,073 to $2,094. Thus, the certificate of deposit is used to pay the homeowner the amount by which his mortgage payment of $2,568 exceeds the affordable payment of $2,094 – or $474.
5. During Years 2 through 10, the:
• Affordability Index rises 1% each year.
• Certificate of deposit is used to pay $20,000 of the HomeShield loan at the end of each year (except year 10, when we assume the loan is paid in full. See below).
6. At the Conclusion of Year 10, the:
• Affordability Index has risen 10.5% (with compounding)
• Homeowner can now afford 10.5% higher net payments, equaling $2,290
• Certificate of deposit balance is $276,973
• HomeShield loan balance is $261,093
• Certificate of deposit is used to pay down HomeShield loan balance to zero and returns $15,880 to the homeowner.
• Homeowner has amortized his first loan down to $307,036. If he were to refinance into a new 30 year mortgage at 7.5% interest his payments would be $2,147, well within his affordability level of $2,290.
In the case of a prepayment, the bank’s original loan terms apply, and the HomeShield loan’s unamortized principal is adjusted by the Affordability Index. In the case of default, Market Shield retains a first lien on the unamortized certificate of deposit, and the bank has first lien rights on the home. HomeShield’s program should have only minor effects for itemizing taxpayers; while interest on the certificate of deposit is taxable, interest payments on the mortgage and HomeShield loans are deductible.
This program meets all parties’ objectives. The borrower avoids foreclosure, keeps his net monthly payments at an affordable level and will own the home outright at the end of the mortgage period. The lender will have seen its loan return to performing status and will eventually be paid in full.
FAQ
What government action is required to implement this solution?
Provide incentives to convert to the HomeShield solution.
Why is indexing to market rent changes fair and sensible?
Borrower pays less when rents stay lower and pays more only when typical households can afford the increase.
Why is it sensible for the homeowner to take on another large loan?
The HomeShield loan is backed by a bank certificate of deposit, so it can always be used by the borrower to repay nearly the entire loan. The amount of the loan not protected remains a modest amount that can be repaid upon refinancing the first mortgage.
Who provides the rent indexes?
The U.S. Bureau of Labor Statistics publishes the Rent of Primary Residence index each month for all significant metro areas.
What does Market Shield get out of this?
Market Shield structures have been under development for several years prior to the current home mortgage crisis. Market Shield Capital was formed to commercialize the Market Shield Structure. When the crisis took shape we realized this structure could help. We do not expect compensation above cost for purely governmental programs. When private industry makes money we expect a modest participation.
Can the loan be applied to new purchases?
Yes, within regulatory requirements. Results would be affordable payments tied to market rents. This solution may increase property values, help stabilize the housing market, and
attract fresh capital to residential lending.
For additional information, please contact:
Allan Weiss
Market Shield Capital
617-999-0450
aweiss@marketshieldcapital.com
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