RADHA LOANS: An Effective Solution to the Real Estate Crisis that is Simple, Affordable & Fast
SYNOPSIS
Name: The RADHA Group
RADHA:
R = Real Estate
A = Association for
D = Depreciating
H = Housing
A = Assets
Named after the Goddess of Devotion. This mortgage program has had a series of names as the program evolved from Compound Mortgage, to Duel Mortgage, to Depreciating Mortgage and DepriMortgage, to De-LETO: Depreciating Lease To Own, to FEB: Fast Equity Builder and FAB. We are going with RADHA Loans after our company, the RADHA Group, until the final name is decided.
Who Are We
RADHA Loan was developed by a NY Realtor, John ‘Raghu’ Giuffre, and an economics institute, Guerrilla Economics, in response to the Subprime mortgage Crisis. We looked into the lease-to-own system thinking it may offer some new options to the mortgage crisis. Once developed, this mortgage model was presented to Mr. Carlos Calderon, at the OAS Credit Union. It took several months to clear it through their company’s attorney’s & accounting firm. Upon approval, Carlos provided the letter of endorsement & helped to form the RADHA Group.
Opportunity: Market
1) Mortgage backed securities have always been 30% to 60% less than their corresponding retail values in the real estate market or what homeowners could (and would be willing to) pay. This leaves a 30% to 60% spread between what homeowners’ could afford and the price banks were selling their mortgage backed securities. This ‘spread’ is lost once the home is foreclosed upon. Foreclosed homes sell for 20 to 50 cents on the dollar. The homeowner would/could pay 60 to 70 cents on the dollar. Refinancing homeowner allows banks to capture this higher value over foreclosures.
2) Banks have already written down these mortgage-backed-securities. The write-downs are at least equal to the real estate market’s 30% depreciation. Many banks have written off significantly more than this 30%. In many cases, banks have written off 40% to 80% of their mortgage backed securities. Refinancing homeowners’ mortgages would allow banks to recoup this difference and provide them with a substantial refund of 20% to 70% of the amount they have already written off.
3) Insurance companies have also written down another 20% to 40% of their real estate holdings. Gov’t has done the same by paying down some 15% to 25% of the markets real estate and securities holdings. (The gov’t has paid this through bailouts and other misc. banking and housing programs.) Combining all the write-offs by the banks, gov’t & insurance companies equals a 25% to 50% write-down of these securities entire worth. The write down by each party is not enough (for the individual assets they are holding). However, the combined write-down by all of these players is significantly more than the market depreciation of the actual real estate market (from which these securities where issued).
4) Many of the securities being held by the bank and insurance company are a duplicate copy of the same mortgage though they are indexed by each company as a separate one. The write-down by each industry is in fact paying off the same loan. Combining these write-downs allows us to tap the full contribution made on these mortgages (by the banks, insurance companies and gov’t). However, these write-downs can only be combined at its place of origin: the homeowner. Attempting to ‘attack the problem’ at any other juncture will only help that small, particular market segment rather than resetting the entire chain of the mortgage process from home loan; to security; to credit-default-swap. Explained in Demo 9.
5) Helping the homeowner provides a double bonus: less debt plus more spending money.
This reduced mortgage will show-up in the economy as both a reduced consumer debt as well as greater consumer spending. This added spending power is never transferred out into the market place when it is kept as an internal accounting write-off on the banks books. Once this write-down (by the bank) is passed-off to the homeowner (by lowering their mortgage), the homeowner will have all this added spending power. This is not a onetime spike of petty cash (like previous stimulus programs), but a savings that will show up annually for the next 30 years. The bank can now loan against this new found spending power. There is no new business when the bank keeps the rewrite-downs to themselves. The best part is that banks already paid this ‘cost’ in last years’ ‘write-downs.’ There is no need for any further out-of-pocket cost to extend these mortgage savings to the homeowner. Because no new money has been added, there is neither an inflationary impact nor recapitalization required.
Preface
The irony of this mortgage crisis is that the whole-sale depreciation of the mortgage-backed-securities has always been several times greater than the retail price of the real estate market or what home-owners could afford to pay. This means that bailing out homeowners would have reinstated Wall Streets’ lost value for about one third the cost banks have been spending to write-off these securities. The difference presents a 50% spread between Wall Streets’ write-downs and the properties values or the ability of the home-owners financial status. If only we could overcome the ‘disconnect’ between Wall Street and homeowners. RADHA bridges this great divide to capture that 50% value just waiting to be reclaimed.
Excerpt from Demo 9: REBATE FUND TRUST:
Tapping the 50% Spread Between Securities & Real Estate
I’m a NY Realtor and worked with Guerrilla Economics to develop the RADHA Loan program. We introduced the program a few months later to the OAS Credit Union in Washington DC. They took several months to have it vetted by their lawyers and accounting firm before introducing it to their clients and other Credit Unions such as the Credit Union Mortgage Association. This was cleared by their accounts just before the Christmas and New Year’s Holiday season so they are only now beginning to refinance mortgages using this RADHA Loan. They offered a resounding endorsement as their letter states.
People ask why other Wall Street or banking professionals did not discover this rather simple program. I suggest it’s because they were looking at the issue from the perspective of financial institutions while we looked at the issues from the perspective of the individual buyer. More specifically, we discovered it looking into lease-to-own programs (once the subprime crisis began to unfold). Lease-to-own is something of a disdained area for most financial institutions.
This remains one of the few programs crafted by a Realtor. It seems odd we did not have more input from Realtors given that much of this financial crisis is actually a real estate problem more than a banking or even economic one. Here’s a take on the issues from a realtors perspective, which is to say that it is taken from the street level versus the banking view which sees issues from the high perch of gov’t policies and financial technicalities. As RADHA will show, these are two different worlds and as such, RADHA offers perspectives and proposals entirely different from anything presented by the financial or state sectors and one notably missing.
We offer a host of insights that would only be discovered by someone outside the financial sector (looking from the street level through the perspective of the homeowner). It therefore offers a whole new context to the crisis that is both new in its approach and intriguing in its possibilities.
Raghu Giuffre Real Estate Agent, Mark David Realty
Excerpt from Demo 5
…the bank writes-off the debt, but the homeowner is still held to the entire debt amount and so the added spending power of the debt reduction is never extended out into the market place. The write-down is therefore never fully tapped and realized by the bank, market or the economy. However, if the bank’s write-down was passed off as a reduction of the homeowners’ mortgage debt, you will have moved that new found spending power out to the homeowner and into the market. Again, that economic value is double the debt reduction. It is a debt reduction of $8,000 a year. The owner no longer has to pay this debt and so can now use this same $8,000 for other purchases. In this way, it is a minus of the debt plus the added spending power, whereas the last stimulus was entirely spent by tax payers on debt alone and so little was spent on new purchases.
Excerpt from Demo 3
…the bank only wrote off 21% of the mortgage over two loans and a half decade while the homeowner paid off 19% in the 1st Term. The gov’t added just 3% for a total of 43%. ...In addition, the homeowner is willing to pay the additional 5% difference while in today’s market, the bank would be responsible to cover the entire 50% write-down, up-front. In RADHA, the bank can save on these minor differences of 5% and even 10%. ..However, once you foreclose upon the homeowner, the spending power of that owner (expanded by the debt reduction) is lost for good…
Excerpt from Editors Note B:
Market to Market Write Down – Unnecessary w/ RADHA
The reductions on the monthly payments are achieved through Interest Deductions, not Principal Reductions. …Therefore, banks employing the RADHA system (who do not change the principal amount) should NOT be required to make this additional (market to market) capital contribution. If true, the RADHA Loan would save banks billions in capital requirements.
RADHA makes the issue somewhat mute. RADHA also includes a large capital infusion through the sale of the 1st Term Loans. This capital infusion would offset these write-downs even if they are required. The 1st Term Loan finances (20% to 45%) of a bank’s entire real estate holdings. If there is still going to be a market-to-market capital write-down, it should be after the bank has received the funds from the sale of this 1st Term Loan. The bank will then have the cash in par with the write down, saving our banks from bankruptcy and saving our gov’t from hundreds of billions in bailout ‘loans.’
(If no longer required under RADHA, then)…the bank is first spared the $50,000 recapitalization of the loan as required by the market-to-market rule. The bank then receives the additional $50,000 in new capital by selling this 1st Term Loan. In total, the bank has received the equivalent of a $100,000 capital balance between the cash infusion and the capital savings. Put another way, gov’t needs a 50% cash bailout of the banks entire real estate portfolio to match the accounting value offered by this RADHA system. And yet, this entire arrangement cost the gov’t nothing.
..Even if TARP (‘Bad Bank’) could work, the plan itself is a convoluted approach to the same function achieved by this simple step: give banks the option to write off the last 25% of the depreciation in 5 years from now as achieved by this 2nd Rebate. This offers all the functions to be served by the holding, ‘bad bank.’ We have in fact combined the functions of both the market-to-market rule alongside the Holding (TARP) Bank’s extended time frame. We first capitalized the write-down using the homeowners refinanced 1st Term Loan and Rebate. We then extend the properties short term market value against its actual long term value with the 2nd Rebate as TARP attempts to do.
Rebates will allow banks to more accurately price their mortgages. They offer a fairly solid investment with the 1st Term mortgage.(The monthly should be 50% lower than a 30 year mortgage. The property can easily rent if the homeowner walks out. In this way, investors are capitalizing the safe and productive portion of the loan while the bank’s rebate has written-off the dead or ‘toxic’ portion of the 1st Term Loan.)
Banks then take any additional write down in the 5th year (to match the market value at that time). This Rebate creates a ‘market floor’ for these mortgage (securities). Rebates remove investor’s risks. Rebates will therefore jump start the real estate and securities markets. Banks can sell real estate securities for significantly more once investors know banks (& gov’t) are covering any future depreciation – through these rebates. In the mean time, the 1st Term Loan allowed investors to loan against the one part of the loan they know to be solid while the rebate wrote-off the part of the loan the bank knows to be ‘toxic.’ The two Loan Terms allowed the bank and investors to repeat this process on the same mortgage. In this way, the mortgage is revisited twice allowing for any additional adjustments of values a half decade later.
Excerpt from Editors Notes E: RADHA vs. Interest Only Loan
The bank pays this interest by keeping the interest rate very low or writing it off (as a tax write-off) on the Interim Loan. In this way, the homeowner and bank are actually paying off the same loan simultaneously. It therefore becomes a dual payment on the same loan. (We sometimes refer to this program as the Dual Mortgage system for this reason). The homeowner’s payment is paying off the principal while the bank is making the equivalent of another payment to cover its normal interest charges. …The home owner would have to pay twice the amount to duplicate the speed at which RADHA can pay off the loan (if the bank was not covering these interest write-offs).
