Home equity insurance financial product

[0001] This application is a continuation-in-part of prior application Ser. No. 10/011,829, filed on Dec. 7, 2001 titled Home Equity Insurance Financial Product to the present applicants, and the contents of which are incorporated by reference, as if restated in full.

[0002] The present invention, in general terms, is directed to a new form of a financing instrument. More specifically, the present invention is directed to a financial tool and system capable of providing real estate holders and investors with enhanced risk management protection against the risk of depreciation in housing values.

[0003] While the 1990s witnesses an unprecedented increase in the valuations of stocks and other similar securities, the real estate market and holdings in real estate remained a substantial if not dominant asset for individuals. Representing literally trillions of dollars, real estate is a vital reservoir of consumer savings and ultimately, a powerful engine to our economy. Indeed, the importance of home ownership and real estate in general is reflected in tax advantaged treatment of capital gains on housing, interest rate deductions and other governmental subsidies that remain in place as an incentive to home ownership and other real estate investment. It is now generally accepted by economists that real estate investments in general and home ownership is an important factor in the growth and success of the economy, both within specific neighborhoods and nationwide.

[0004] In addition to the tax breaks, home ownership is supported by governmental lending organizations such as Freddie Mac and Fannie Mae. These institutions have been incredibly successful in providing an environment that makes lending to purchasers of homes highly efficient and with low risk. Fluid secondary markets permit the free exchange of promissory notes corresponding to mortgages on select real estate assets. Together, these vehicles have greatly lowered the effective cost of home ownership, extending the universe of potential purchasers to a broad cross-section of our economy.

[0005] While home ownership is part of the American Dream, it can also be a very risky investment. Generally speaking, individuals are not allowed to purchase stock on more than a 50% margin. Yet many people purchase a house on 95%, even 97% margin. As a result, their investment is very highly leveraged. When house prices rise, as they usually do, the person makes a large amount of money and this often helps finance retirement. The problem arises in the cases where the house falls in value. Even a small decline in value can lead to a large financial loss given the large leverage. It is often the case that the people who are most highly leveraged are also the people who are least able to suffer the financial loss.

[0006] Although home ownership has helped create wealth and neighborhood growth, there remain neighborhoods that have not shared in the benefits of the system. These are often urban areas and areas of higher unemployment and crime. Houses in these areas have a higher risk of outright depreciation over time. As a result, people who see desirable property and attractive property values are still hesitant to purchase a home in this area due to the legitimate fear that this will not be a good financial investment.

[0007] To the extent that people do make a purchase and the home value falls, the results are also problematic. The person can be trapped in that they end up with no equity or even negative equity in their house. Without money for a down payment elsewhere, they have no ability to move in order to take a new job or even refinance their mortgage to take advantage of lower interest rate. The end result is often a high default and foreclosure rate, which leads to further losses. These abandoned properties further reduce the value of the neighborhood. Lenders, recognizing these possible outcomes, often require private mortgage insurance, which can be very costly because of the real risk of default.

[0008] The risk of downward movements in house prices interferes with important social objectives in securing enhanced living standards within these areas. There is little debate that increased home ownership often leads to higher employment rates, lower crime, better schools and generally more civic involvement by the residents of the community. The difficulty remains in fostering home ownership in a cost-effective manner. It is with this understanding of the problem that formed the foundation of the present invention.

[0009] It is an object of the present invention to provide a financing tool to permit enhanced real estate investment in select areas and regions.

[0010] It is another object of the present invention to provide a computerized financial management system.

[0011] It is yet another object of the present invention to provide a system for managing and directing the distribution of financing products associated with real estate mortgages.

[0012] It is a further object of the present invention to provide a novel financing instrument that reduces the exposure of a mortgage note holder to a real estate asset that declines in value.

[0013] It is another object of the present invention to provide a data management system for tracking and controlling financial products that assist in reducing risk exposure in the real estate market.

[0014] It is a further object of the present invention to provide event tracking regarding select real estate properties and for maintaining a database regarding these properties in accordance with these events.

[0015] Another object of the present invention is to deploy a risk adjustment product that implements a real estate property valuation index that changes over time to reduce equity exposure for homeowners.

[0016] A further object of the present invention is to provide a risk abatement product that is de-coupled from the home sale transaction.

[0017] A separate and further object of the present invention is to provide risk management tools that are created and repose independent of the original financing or refinancing of a home purchase.

[0018] The above and other objects of the present invention are realized in a novel data processing system and mortgage related financial product for risk control. The financial product includes implementation of a time-dependent real estate asset valuation index for discerning changes in local, regional, or national real estate values. The index value is periodically assessed and applied to individual mortgage accounts as a form of asset depreciation insurance.

[0019] In accordance with the varying aspects of the present invention, the risk management product is implemented on a data processing system so that salient events can be properly tracked, and asset transfer processed in accordance with the governing system logic. A database is linked to the processor, storing core data on each account, supplemented with event data collected periodically and directed to transactions associated with individual accounts and/or properties. System operation is designed for use in a wide spectrum of operative environments. The system is implemented, in a first mode, by the mortgage lending institution, as a form of equity insurance coupled to its loan products. A second mode includes system operation by a dedicated guarantor, contracting with lending institutions for risk insurance products. Other modes, as contemplated herein, will be discussed in detail in conjunction with the various embodiments provided with the detailed specifications.

[0020] In a further and alternate inventive arrangement, the risk management and/or insurance financial product is marketed and managed separately from the real estate assets associated therewith. In this arrangement, the novel financial product assumes characteristics more similar to an insurance or option contract. In this particular arrangement, the financial product is purchased and created with a mortgager of a real estate asset having the first claim against payment under the product's pay-out provisions. However, this is the only link between the product and the asset falling within the defined index.

[0021] By de-coupling the financial product from the actual real estate purchase process, it becomes accessible for more widespread use. For example, the financial product, structured in this fashion may be used in markets that have large valuation increases, as a hedging vehicle without a purchase transaction. As such, the financial product becomes an effective hedge against cyclically driven retreachments in real estate values. It also breaks the link allowing subsequent refinancing on the asset without a home sale event. In this arrangement the subsequent mortgages will enjoy the risk abatement feature of the previously purchased financial product.

[0022] There is no requirement that operations have regional geographic limitations. As the product is offered on a more national level, the risk is easier to diversify and the expected cost will fall. System operation envisions broad flexibility. For example, the amount of the insurance protection may be equal to the mortgage amount, the house value, amounts in-between, or even more than the home value. This would not be done as a form of gambling. Insurance or risk abatement, in the preferred embodiments, is based on movements in the index value rather than the value of a specific house. As a result, if the predicted movement of the house price is more volatile than the index (in stock market terms, one would say the house has a beta of more than one) then the person might want to purchase protection on more than the value of the home. For example, if a person could predict that a 10% decline in the index would lead to a 20% decline in his or her home value, then the person might want to purchase double protection in order to minimize his or her risk of losing money.

[0023] For a more complete understanding of the specific embodiments, FIGS. 1-4 are provided as illustrations relating to the practice of the present invention, wherein:

[0024] FIG. 1 is a functional block diagram of the operative entities participating in the present invention;

[0025] FIG. 2 is a flow chart depicting the account creation and continuation process;

[0026] FIG. 3 is a flow chart depicting the account management process; and

[0027] FIG. 4 is a flow chart depicting the account management process.

[0028] First briefly in overview, the present invention, in a first aspect, is directed to a novel financial product used in conjunction with traditional lending vehicles, to modulate the risk otherwise attendant to home financing and ownership. The inventive financial product is linked to the purchase-sale of real estate assets subject to mortgage financing. The financial product is, in part, an insurance vehicle that adjusts the current outstanding balance of the mortgage so that it reflects a decline in the value of the underlying real estate asset. In this way, if the real estate property drops in value at some point in the future, the owner can be partially or fully insulated from this loss.

[0029] This insurance/risk modulation is accomplished by establishing a regional index value for the select geographic area where the property is located. This index value is calculated on some periodic basis in an objective manner to ensure accurate reflection of the encompassed property values. There are several commercial enterprises that provide such indices. These include CSW (Case-Shiller-Weiss) and MRAC (Mortgage Risk Assessment Corporation). The government also calculates real estate value indices; OFHEO (Office of Federal Housing Enterprise Oversight) provides a same-sales real estate price index on the web.

[0030] It is expected that the index value will be calculated based on market prices of properties in a geographic region. Factors taken into account include historical sale prices, price movements in regions with similar demographics or housing markets, along with many other factors. There is no requirement of any one approach and for purposes of this invention, a myriad of different index valuation techniques may be applicable. For the differing embodiments of the present invention, more than one index value is used in conjunction to effect the risk transfer function. For example, adjustments in loan balance and/or payments may be a function of both regional and national indices. Individual index values, RE(K), are typically time functions of property transfer pricing aggregated across the price spectrum and then normalized for application to the instant property.

[0031] A second aspect of the present invention relates to the data processing mechanisms used to implement the commercial application. This data processing system includes hardware distributed on a network, and program controlling software for managing the system. It is expected that in one embodiment, the system will be Web enabled, and in this way, operate on the Internet to permit communication among the various elements of network. Internet operation involves a central server for data retention and security access control. Programming is provided in Web compatible HTML/XML formats to ensure broad compatibility with available Browser technologies.

[0032] Entities involved in the creation of risk abatement financing accounts log on remotely for account creation and management functions. Account creation will involve typical data collection processes, per se, well known in the banking community. For example, account data will include select demographic and economic data associated with the borrower(s). Additional select data relating to the real estate property forming the loan collateral is also collected. Recognizing that verified data on the property may be important, system operation includes checks to ensure accuracy. Third party appraiser services will link into the process and responsive property value data collected electronically for storage in conjunction with other account data. Confirmation of application fees, etc. is made through banking links.

[0033] Risk abatement features will either be set or variable. Variable features stem from targeted financing in select regions and include governmental subsidies, such as neighborhood redevelopment investments, block grants, and the like. Account data, stored in the system database includes details regarding adjustable parameters subject to these forms of subsidies.

[0034] Supplementing account creation, system programming further provides assisted approval processing and finally system event management. The approved processing provides screening of account applications to ensure proper implementation of risk abatement financing. The system event management involves the processing of periodic account events (insurance claims, sales transactions, etc.) to update the account data and account participant positions in response to these events.

[0035] With the foregoing brief background in mind, attention is now directed to FIG. 1. In this figure, the securing of the risk abatement financial product is provided by Lending Institution 50. The Lending Institution can be a bank, money center, or other entity responsible for providing retail mortgage products. Lending Institution 50 has one or more relationships with Secondary Financial Companies 60, 70, and 80. These Secondary Financial Companies specialize in providing the risk abatement product to the Lending Institution, individually or bundled as an aggregate product. Buyers 10-40 interact with the Lending Institution as potential borrowers in financing their acquisition.

[0036] The Lending Institution can also provide the risk abatement financial product directly, and, in this arrangement, the Secondary Financial Company's functionality is merged into Lending Institution 50. In addition, the Secondary Financial Companies can offer risk abatement products directly to borrowers as a retail product (e.g., Buyer 40 in FIG. 1). In this arrangement, account data storage and processing occurs at several locations. Funds and commitments to support risk abatement are collected by the Secondary Financial Companies through institutional investors, governmental subsidies, and the like.

[0037] A simplified example will illustrate the foregoing operation. For a house purchased at a price of $100,000, the buyer puts down $10,000 and takes out a 30-year $90,000 mortgage at 7.5% interest. A regional index tracks changes in aggregate housing prices. In this example, we have the homeowner taking out protection on the full value of the home, $100,000, and not just the value of the mortgage. If the index falls from 100 to 90, then the homeowner has a $10,000 guarantee that comes in the form of a balloon payment at mortgage termination.

[0038] Continuing, this drop in the index occurs after living in the house for five years. At that point, the homeowner has paid off approximately $4,900 in principal. To payoff the rest of the mortgage would thus cost $85,100. Of this amount, $10,000 would be provided by the risk abatement product. Thus, if the homeowner were to sell the house (or more generally prepay the mortgage), the cost of the mortgage payoff would be $75,100.

[0039] The net impact on the homeowner is as follows: If real estate prices were to fall by 10% and the house was to be sold for $90,000, the homeowner would payoff $75,100 for mortgage and have $14,900 leftover. However, the homeowner had put down $10,000 with the purchase of the house and paid another $4,900 over the first five years of the mortgage. Thus, the homeowner has paid $14,900 in principal and received all of it back Although house prices have fallen, the homeowner gets all of his savings and down payment back.

[0040] Compare this situation to the status quo. If house prices were to fall by 10%, the entire loss in value would be born by the homeowner. The cost of prepaying the mortgage would be $85,100 and so the homeowner would net only $4,900. This amount reflects his principal payments over the first five years. The entire $10,000 down payment would be lost. In fact, if the homeowner has to pay a 6% commission on the home sale, the homeowner's takeaway amount would be reduced to a negative $500. The person would have lost all of his equity in the home and then some. Even with the risk abatement product, paying the real estate commission would eliminate most of the person's accumulated $4,900 in savings. However, the person would still have $10,000 of his original down payment and thus be able to purchase a house in another location. As such, the risk abatement product has served its essential purpose.

[0041] The foregoing example assumes equity protection based on the nominal value of the home. An alternative, albeit more expensive approach provides the protection for the inflation-adjusted or real value of the home or to any other indexed value.

[0042] Other adjustments can be made. The payments can be made at the end of the mortgage and thereby leaving the principal and amortization schedule unchanged, or the protection can be provided along the way. For example, consider a case in which $100,000 of protection has been purchased, the mortgage stands at $80,000, and the relevant real estate index has fallen by 10%. One option is to allow the homeowner to payoff the mortgage with $70,000 and have the insurance provided be responsible for the remaining $10,000. Another approach would reduce the mortgage to $70,000 today. In this second scenario, either the term of the mortgage would change and the payments could stay constant or the payments could be reduced and the term could remain constant. Note further that in this approach, if housing prices were to rise, the outstanding principal on the mortgage might rise again. (It is possible to give the mortgage holder the lowest index level or to have the payment in effect be reversed if housing prices return to their original level or higher.)

[0043] This arrangement is the same as that described above for Example I, except that the outstanding principal or payment is not adjusted. In this structure, the risk abatement product provides a payment to the mortgagor upon sale or other loan terminating event. This payment corresponds to the drop in market value as set by the pertinent index, and is made in lieu of, and to complete full payment of the outstanding balance by the mortgagee. Alternatively, the contract can be structured as default insurance, with payment due only upon default by the homeowner and a corresponding drop in real estate values as established by the index.

[0044] In this example, the novel financial product is not necessarily created during the home purchase process. Homeowner A purchases a $500,000 home in a suburb that has enjoyed 20% annual real estate asset value growth during the preceding three years. Two years go by with essentially zero appreciation, and the economy is entering a cyclic recession. Homeowner A may be forced to sell and move during the next several years and, therefore, wishes to hedge against an ensuing drop in property value.

[0045] Homeowner A purchases the risk abatement product (RAP) as offered through various channels of distribution, e.g., banks and brokerage houses. Select demographic and asset specific data are collected and utilized to price the product and coordinate its issuance. Several variations may be used. In one of these, the financial product is depreciation risk insurance, involving a monthly premium for a set 10-year term, payable upon a select set of transaction events, including (i) sale of house, (ii) refinancing of loan, or (iii) expiration of 10-year term.

[0046] Application process is computer assisted with core data collected forming the applicant's file within the database. The system includes pricing algorithms for use in assessing the proper premium for the property in view of stored risk factors and market demand for this risk. The financial product is created in accordance with these features with optionally inserted adjustments from the oversight committee.

[0047] In this way, the financial product is de-coupled from the home purchase process, linked merely by the final payoff to the mortgager if the value of the house, in fact, actually declines.

[0048] In this example, the novel financial product is further de-coupled from the individual real estate transaction, and is marketed by a dedicated guarantor as pure risk abatement insurance. Owners of real estate apply for the insurance product, via known application protocols and the guarantor/system operator prices the product based on parameters logically applicable in formulating projections as to future price changes within the selected geographic area. The term is event driven with an open term, or set term with an option to review, or a set term without renewal rights.

[0049] A premium schedule is developed with payment at termination directed to the homeowner, not the mortgagor. A drop in market pricing is discerned, as before, via application of a regional index, thereby eliminating exposure associated with individual properties and the failure of upkeep or similar factors in final market price or sale.

[0050] Turning now to FIG. 2, a flow chart depicts the logic structure associated with the account creation process. These are presented in high level generic programming statements for illustration purposes only. Actual system implementation will utilize, per se, well-known software, e.g., Fortran, Cobol, Visual Basic, C, Pascal, etc., having sufficient ease and flexibility for accomplishing these tasks. Likewise, the system hardware will include network-based CPU's corresponding to the size and complexity required for the specific implementation. Logic conceptually starts at block 100 and account identifier ACCT(1) created at block 120 for future tracking purposes. The system then collects account data, such as buyer/borrower economic data, demographics, and information about the selected property, block 130.

[0051] At test 140, the system screens the account data to determine suitability and qualifications of the account applicant for the risk abatement product. Flags at this stage branch logic to Alarm 180.

[0052] Continuing with FIG. 2, an applicant that passes screen 140 continues to block 150, where the applicable real estate index is recalled, RE(K) for the specified property/region. The Index is for the current cycle (period) and may be calculated directly, recalled from a separate database and/or adjusted with current data. At block 160, the risk abatement product, RAP(I) is generated for that applicant. This is then tested for suitability with RAP(I) values that fall outside the predefined criteria triggering Alarm 180. If the generated RAP(I) is suitable, logic continues to block 190 to update the database with the approved RAP(I) parameters for that account. Logic continues to the next applicant, block 200.

[0053] A further parameter includes a lock-in option, that if selected, allows the user, once a triggering event has reduced the mortgage, to lock in the new lower payment (amount or schedule). In lieu of the lock-in option, the contract may include a one direction clause, insuring that only drops in the payment amount or schedule are recognized, and that subsequent rises in value do not affect the payment amount or schedule.

[0054] As can be recognized, an important function of the present invention is to provide investment insurance to the borrower. Operation is however, not restricted to conventional mortgages, but compatible to the full spectrum of mortgage financing now on the market or that may develop in the future. This includes all forms of fixed and variable rate products, shared appreciation mortgages, reverse equity mortgages and the like, consistent with the above operating parameters. Expanded use of the system also encompasses pure insurance applications, decoupled from a mortgage product altogether. In this way, property owners, with or without a mortgage, can apply for and receive an account to insure the future value of their property against a slipping real estate market.

[0055] Initial pricing of the RAP instrument is system driven and based on stored profiles, user selected parameters, and the pricing matrix available from third party financing suppliers. In the presently preferred embodiment, pricing is coupled to the actual mortgage loan structure, thereby appearing transparent to the borrower. To induce proper third party participation, and to pay for the coverage, pricing is provided to the borrower in the mortgage process as a slightly higher interest rate, additional points towards closing (i.e., prepaid interest) or a combination of rates and points adjustments. Pricing is in conjunction with an existing private mortgage insurance (PMI) product or in lieu of such a product, recognizing that the final mortgage rates and points will be influenced by PMI. Reducing the risk of a negative equity position greatly reduces the incentive to default. The expected losses in the event of default are also mitigated because of the insurance payment.

[0056] The system further permits instrument structures that extend beyond the value of the underlying real estate asset. For example, the property in question may involve a mortgage of $100,000 and the instrument set to govern a value of $200,000. In this structure, the instrument provides leverage beyond the initial price of the property, permitting a real estate short position by the investor. Alternatively, the amount may remain the same, but a beta assigned to the index, multiplying its impact on the principal responsive to a market drop in property value. Of course, the cost of this position is determined in the initial pricing matrix that is subject to the then current market conditions.

[0057] Turning now to FIG. 3, a logic diagram depicts the general processing associated with event management. Recognizing that many events will evoke system processing, any illustrative example directed to a house sale event is provided with the understanding that general principles of account processing are applicable to other events (such as refinancing). Logic begins conceptually at Start, block 300, and continues to block 310 for entry of the selected account, ACCT(1). The sales transaction associated with the account is provided at block 320, TRNS(J). Data associated with this transaction includes the index value, RE(K), for that sale period. Test 330 confirms that a drop in the index value has occurred (Yes); otherwise, logic branches to block 335, and the storage of final account data, ACCT_DAT(1).

[0058] In response to a lower index value, the system quantifies this drop, block 340 and thus calculates the mortgage payoff, MORT(I), with risk abatement adjustment, block 340. This process is checked, test 360, and if confirmed, continues to the next event, block 380.

[0059] Implementation of the present invention is provided in several different modes, and is established by the parameters of the risk abatement contract corresponding to the governing instrument. These parameters will have a varying function set, and based thereon, individual users may custom tailor their corresponding policy in accord with their select needs. In one arrangement, the real estate index is tracked and on a periodic (monthly) basis, the system determines whether the property value has dropped by an amount that triggers a mortgage adjustment. If so, the system makes the adjustment which may be expressed in a distinct fashion. For example, if the option is selected, the monthly payment may be reduced by an amount corresponding to the change in the index. Alternatively, the payment schedule may be changed, e.g., requiring 30 payments, down from 36 payments to extinguish the mortgage.

[0060] Turning now to FIG. 4, a logic diagram depicts the general processing associated with event management.

[0061] In addition to the event driven processing discussed above, system operation may proceed on a time controlled basis, with calculations regarding real estate index changes triggered at select periods during the mortgage term. Processing in this context is presented infra with reference to the logic path depicted in FIG. 4. As presented therein, logic begins conceptually at block 400, and continues to block 410 for entry of the current DATE.

[0062] Continuing in FIG. 4, the current DATE value is tested to discern if a adjustment period has occurred, test 420. If the DATE does not match (No to test 420), logic branches and processing ends for that cycle. However, a positive match at test 420 continues logic to process the index value and determine whether a mortgage adjustment should be made. This begins at block 430, wherein the current cycle real estate index value in recalled. Again, this value may be recalled from a stored memory location, or calculated in real time from basic data. In either event, at block 440 the system recalls account parameters necessary to determine if a drop in real property value has occurredand if so, the magnitude of the drop, based on the current index. These are then reviewed at test 450 to discern whether a drop is of sufficient magnitude to trigger a mortgage adjustment during the current cycle. If not, (no to test 450) logic branches and processing ends for that account.

[0063] A positive response continues logic to block 460, and the system determines the amount of mortgage adjustment triggered by the change in the index. At test 470, the system checks if the drop is of sufficient magnitude to end the mortgage and pay off the loan. If so, logic continues to block 475 and the mortgage is canceled. This is then repeated for the next account, block 480.

[0064] Although the invention has been described in detail for the purpose of illustration, it is to be understood that such detail is solely for that purpose and that variations can be made therein by those skilled in the art without departing from the spirit and scope of the invention.