A home appreciation participation note or HAPN is being developed by financial engineers in Rockville, Maryland to be used as an instrument to allow homebuyers sell rights to an anticipated appreciation to investors who are willing to shoulder the losses in the event that the value of properties decline.
The increase in foreclosure homes is being blamed on homeowners’ decision to choose risk-heavy loans such as adjustable-rate mortgages (ARM), option ARM and interest-only mortgage. Experts agree that if only homeowners opted for shared-appreciation mortgage, foreclosure homes would not be as widespread as it is today.
Shared-appreciation mortgage involves investing money on a property to reduce the interest rate and in exchange, the investor will get a share of the revenue in the event that the property was sold.
If more borrowers opted for shared-appreciation mortgage, foreclosure homes would not have been as grave a problem as it is now, dragging down the housing market.
Meanwhile, to help abate the growing number of foreclosure homes, several programs and tools were created by various organizations and agencies.
The HAPN is designed to address the issue of affordability facing homebuyers and the possibility that the value of the property would decline.
The instrument allows homebuyers to stay in their properties while selling shares in the event that the houses’ value will go down beyond the original market price that they paid for.
The larger the amount that investors put on the property, the more it becomes affordable and therefore, less likely to be added to the growing list of foreclosure homes.
In a nutshell, the investor will put in a significant amount of cash so that the homeowner could afford to pay the monthly mortgage, and in return, the investor will get a share of the total profit in the event the property is sold.
Integrated Financial Engineering President Barry Dennis explained that homebuyers will sell today what they would eventually sell when they decide to move on.
HAPN’s advantage over shared-appreciation mortgage is that the appreciation is not tied up to the market price of the house when the homebuyer sells it. Instead, the appreciation is based on the estimated value of the house if some characteristics of the property have not changed since it was acquired.
Unlike shared-appreciation mortgage, homebuyers under HAPN will not share their profits that come from improvements that they make.
The HAPN acts as a second mortgage which is hoped to abate the flood of foreclosures.