WO2006086315A2

WO2006086315A2 - System and method for implementing a financial instrument in a real estate transaction

Info

Publication number: WO2006086315A2
Application number: PCT/US2006/004136
Authority: WO
Inventors: Kelly Glenn Robinson; Rhenardo Worrell
Original assignee: Faqs Plan Consulting, Llc
Priority date: 2005-02-07
Filing date: 2006-02-07
Publication date: 2006-08-17
Also published as: WO2006086315A3

Abstract

A system and method for calculating and using a financial instrument from an institution to fund a home purchase, refinancing, or equity line of credit transaction is provided. The financial instrument has no associated periodic interest payment and is structured so that its return on investment will include all or a portion of appreciation if the residential real estate has appreciated in value at the time of termination of the financial instrument. In effect, the financial instrument may be structured so that it provides funds to finance a residential real estate transaction (in whole or in part) in exchange for participation in some or all of the appreciation in the value of the home.

Description

SYSTEM AND METHOD FOR IMPLEMENTING A FINANCIAL INSTRUMENT HAVING EQUITY FEATURES IN A RESIDENTIAL REAL ESTATE TRANSACTION

RELATED APPLICATIONS

[0001] This application claims priority to U.S. Provisional Application No. 60/459,573, filed April 2, 2003, and U.S. Application No. 10/815,998, filed April 2, 2004, the disclosures of which are incorporated herein by reference in their entirety. FIELD OF THE INVENTION

[0002] This invention relates to financing real property, primarily residential housing. More specifically, this invention relates to using a third party financial instrument having equity features in a real estate transaction. BACKGROUND OF THE INVENTION

[0003] A variety of financial instruments can be used to purchase a home, refinance a home, or obtain a home equity line of credit. In the case of home purchases, most financing arrangements involve a first mortgage by a first lender, and many also involve a second mortgage by a second lender. The first and second mortgages are typically debt instruments with a predefined term, an interest rate, and a predefined principal loan amount secured by the property. The various instruments differ in how they address lender and/or buyer issues of liquidity, available cash, income, interest rate risk, collateral value, risk of loss, tax implications, loan-to-value (LTV) ratio, inflation rate, fees and closing costs, insurance requirements, and other factors.

[0004] Adjustable Rate Mortgages (ARMs) typically provide a variable interest rate wherein borrowers bear the risk of rising interest rates. Shared Appreciation Mortgages (SAMs) are another type of loan instrument that typically offers fixed lower interest rates and monthly mortgage payments in return for a share in any appreciation in the mortgaged house. Traditional SAM lenders do not reciprocally share the homeowners' risk of loss if the house decreases in value over the duration of the mortgage.

[0005] There is a continuing need for financial assistance in the financing of residential real property transactions. Many potential homeowners do not have the income or equity to purchase a new home using financial products currently on the market. Similarly, many existing homeowners have a desire to trade up to a new home or refinance their current home, but they choose not to do so because existing financial products do not meet their needs.

[0006] Current residential real estate financing instruments fail to simultaneously achieve the following goals: (1) low and affordable monthly mortgage payments; (2) certainty in the amount of monthly payments over the life of the loan; (3) adequate financial return to mortgage lenders in all future inflation and interest rate environments; (4) elimination of private mortgage insurance (PMI); and (5) removal of the need for a down payment by prospective new homeowners.

[0007] These and other drawbacks exist with current systems and methods. SUMMARY OF THE INVENTION

[0008] Accordingly, various embodiments of the present inventions maybe directed to a system and method for using a financial instrument from an institution to fund a home purchase, refinancing, or equity line of credit transaction. The financial instrument has no associated periodic interest payment and is structured so that its return on investment will include all or a portion of appreciation if the residential real estate has appreciated in value at the time of termination of the financial instrument. In effect, the financial instrument may be structured so that it provides funds to finance a residential real estate transaction (in whole or in part) in exchange for participation in some or all of the appreciation in the value of the home. [0009] According to other embodiments of the invention, methods of calculating, issuing, and purchasing the financial instrument in a secondary market is provided.

[0010] Other embodiments are also within the scope of the invention. BRIEF DESCRIPTION OF THE DRAWINGS

[0011] FIG. 1 depicts a system for system for implementing a financial instrument according to an embodiment of the invention.

[0012] FIG. 2 shows an exemplary system for communicating financing transaction information between an applicant and transaction facilitator.

[0013] FIG. 3 shows an exemplary chart showing the relative values of a first mortgage, financial instrument, and home value for five years after a home purchase transaction according to an embodiment of the invention.

[0014] FIGS. 4A-4B show an exemplary sensitivity analysis of an exemplary financial instrument security according to an embodiment of the invention.

[0015] FIG. 5 illustrates the difference between a home purchase transaction with and without an exemplary financial instrument according to an embodiment of the invention.

[0016] FIG. 6 illustrates the difference between a traditional home purchase and a home purchase of a more expensive house using an exemplary financial instrument according to an embodiment of the invention.

[0017] FIG. 7 illustrates the cash flow of an exemplary financial instrument through the lifetime of the financial instrument, according to an embodiment of the invention.

[0018] FIG. 8 shows financial instrument fees as an income stream according to an embodiment of the invention.

[0019] FIG. 9 shows a method of effecting a residential property financing transaction according to an embodiment of the invention. DETAILED DESCRIPTION OF EXEMPLARY EMBODIMENTS

[0020] The embodiments described herein solve many problems with existing systems and methods.

[0021] Various embodiments of the invention provide a source of funds to finance (or help finance) a residential real estate transaction such as a home purchase, refinancing, or an equity line of credit. The funding takes the form of a financial instrument. Some embodiments of the financial instrument may have equity features and/or debt features. (It should be appreciated that labels of "debt" and "equity" may be used to characterize some embodiments of the invention. Provided that a financial instrument has properties as described for the embodiments herein, it does not matter whether the financial product is classified by state governments or other entities as "debt," "equity," or some hybrid of the two.)

[0022] In some embodiments, the financial instrument may uniquely separate the legal notion of "ownership" between that of "rights to use and possession" and "equity investment." The financial instrument may comprise partnership agreements (e.g., financial partner agreements) that may be created according to some embodiments of the invention.

[0023] hi some embodiments, a homeowner may retain a traditional right of use and possession but surrender a financial instrument investment to a third party at inception of the financing arrangement (e.g., an ARM loan or traditional fixed-rate mortgage) . This investment may comprise a financial instrument subordinated to the loan. The investment may be short term, e.g., 1-10 years. The homeowner may satisfy the financial instrument by refinancing or selling the underlying property and satisfying the loan and the financial instrument from the refinancing proceeds. The homeowner may also buy out the financing, e.g., via advance payment. The funding instrument may effectively take an interest in the property without obligations of debt in exchange for appreciation in the event that the house appreciates during the life of the financing arrangement. [0024] According to various embodiments of the invention, the financial instruments may simultaneously lower payments, eliminate barriers to purchase, and create controls for interest rate and inflation risk. These are advantages to homeowners. Third party equity contributors and homeowners have a shared interest in house appreciation. As they are both on the same side of the equity equation, their interests are not competing. Instead, both parties have a common economic interest in increasing the value of the property.

[0025] According to various embodiments of the invention, new equity instruments may be used to purchase real estate through the use of a computer system. Accordingly, a method for creating payment obligations is provided wherein the payment obligations simultaneously and uniquely may do the following: provide substantially lower monthly payments to prospective owners of real property than conventional methods; create, through an interest in real property, the opportunity for higher rates of return to investors and the ability to assure preservation of those returns under varying inflation and interest rate environments during the life of the mortgages; and develop a single financial instrument including documents and forms, which when used in combination with loans, incorporating a cross default provision in the event of foreclosure, can be separately pooled and securitized.

[0026] One advantage according to an embodiment of the invention is a guarantee of substantially lower homeowner payments while simultaneously assuring attractive and safe financial returns to investors who fund the financial instrument. This may be achieved by having the prospective homeowner become an investment partner with the investor in the interest of the house. Whenever a potential home purchaser applies for credit under the terms of the loan incorporating terms from the corresponding financial instrument agreement, a central processor may determine monthly payment obligations and projected returns to the equity investor. The central processor may accomplish this through calculations performed by a computer. [0027] It is a further object of the invention to create financial instrument agreements and forms which define the legal rights and terms of the financial instruments. The financial instruments can be pooled (e.g., as liens against real property) and securitized as financial instrument certificates or purchased and held in pension funds or real estate investment trusts (REITs). Because house values are positively correlated with inflation the financial instruments may be a unique hedge vehicle.

[0028] It is another object of the invention to remove the barrier that has kept many renters from buying. The National Association of Realtors has reported that lack of down payment is the number one reason given by potential homebuyers that hinders their purchase decision. Some embodiments of the invention may eliminate the need for a down payment while also lowering monthly payments. There are also applications that allow the potential homeowner to buy more house than they can currently afford using current methods.

[0029] According to an embodiment of the invention, a system is provided to calculate the future value of the financial instrument considering parameters set forth in the financial instrument agreement incorporated with parameters from the loan. The financial instrument may be embodied by financial instrument certificates (FICs) when pooled and securitized. The FIC (e.g., which may represent the financial instrument contribution(s)) may be a physical embodiment of the financial instrument. As used herein, the term "institutional partner" may refer to the institution that funds (or may fund or create) a financial instrument.

[0030] The financing transactions contemplated herein may include home purchases, home refinancings, home equity lines of credit, or other transactions. While a specific one of these transactions may be used for specific examples herein, it should be appreciated that the other transaction types may also be used. For instance, while a sale transaction is often used as an example (e.g., as an example of a liquidity event), it should be appreciated that any event that disposes of the property or otherwise changes the rights of the interest-holders in the property may be contemplated herein. For instance, a sale of the property may result in the termination of the financial instrument.

[0031] Also, the following features of a real estate financing may be used herein for exemplary purposes: (i) 3% per year appreciation cap for the financial instrument; (ii) 5 year ARM loan; (iii) purchase price of $100,000; (iv) first mortgage interest rate of 7%; etc. It should be appreciated, however, that (i) the appreciation cap may be any percentage, dollar value, or other criteria, such as 1.1% or $100,000, or there may be no cap; (ii) other types of fixed or variable first mortgage loans may be used, such as SAMs, GPMs, or PLAMs, and those mortgages may have any fixed, variable, or undetermined term; (iii) the purchase price (or other transaction price) may be any amount, such as $412,000 or $32,137; and (iv) the interest rate may be any interest rate, such as 3.28% or 9.2%, and it may change over time (e.g., a variable rate).

[0032] The financial instrument may comprise a lien against the underlying property. The financial instrument may be a shared equity component having value at the inception of the corresponding loan equal to the third party equity investment in the underlying property. However, this value may not be static. It may be affected by changes in the value of the underlying real estate.

[0033] Of the total price required to purchase real property, the homeowner may only borrow part of this amount through a loan. The homeowner may make monthly payments for a specified term (e.g., five years) before a refinance trigger occurs. If and when a refinance trigger occurs, the original mortgage may be completely satisfied. The financial instrument may also be satisfied, refinanced, and/or terminated.

[0034] Since the financial instrument may not be payable until its five year duration (or other term), the primary financial return may be in the value of the house. The financial instrument may be an investment in the house for an amount determined at the inception of the corresponding loan, including all appreciation (or depreciation) in its value up to an annual appreciation cap (e.g., 3% per year). The value of the financial instrument may be calculated using the change in a local house price index as a proxy for the change in the house value, and then by multiplying the estimated rate of return by the original home value at inception. The original home value is then subtracted from this new home value to determine the change in value.

[0035] The home value change is added to the financial instrument contribution amount determined at inception to determine the new value of the financial instrument. To assist this process a computer-implemented processor may systematically store home values from previous sales and appraisals and/or estimate current home values for comparison, e.g., to determine a mean value. Other appraisal methods may be used as known in the art. If the new financial instrument value exceeds the annual cap, then the value of the instrument may be reduced to correspond to the capped value.

[0036] In some embodiments, the homeowner may sell the house, refinance the house, or buy out the financing of the house at any time. However, early sale of the house may be a violation of the terms of the financial instrument, and there may (or may not) be penalties for violations of the financial instrument agreement. The proceeds of the sale may be applied first to satisfy the loan. The remaining proceeds may be provided to the equity investor to satisfy the terms of the financial instrument, hi one example, if the financial partner is entitled to 3% of the appreciation of the house upon sale (or other disposition) per the terms of an agreement, and if the house effectively appreciated at a rate of 2.9% per year, then upon sale the financial partner will take its original contribution plus all of the appreciation (because the net appreciation is less than the cap of 3%). The homeowner would have the remaining paid-in-capital and any original contribution made by the homeowner. It should be appreciated that closing costs and other transaction costs may affect these calculations, as the closing costs are usually paid first. [0037] The mortgage system, embodied within a computer, may include the following components: (1) issuance, (2) origination, (3) servicing, and (4) settlement. The issuance component allows for the input of parameters or financial terms for the creation of the new instruments. This process assures that investors will receive rates of return sufficient so funds are available to align with the issuer's mortgage capital. Origination provides for the quotation of monthly payment rates and initial financing obligations to prospective mortgagors and printing of financial instrument agreements and forms under those terms. Servicing includes supplemental appraisal process to document real property value changes and annual return projections for financial instruments. The system determines a final settlement of the mortgagor, mortgagee and investor obligations at the time of termination.

[0038] FIG. 1 shows a system 100 for coordinating a residential real estate financing transaction according to an embodiment of the invention. As used herein, the residential real estate may be referred to herein as "real estate," "property," or "home." The system 100 may comprise an originator 24, applicant 12, transaction facilitator 10, mortgage company 22, closing agent 18, securities broker 16, investment firm 26, and investors 14.

[0039] The transaction facilitator 10 may be a bank, closing attorney, realtor, broker, or a fund (e.g., a fund having cash for FICs). The transaction facilitator may be one or more of these entities. For instance, the transaction facilitator 10 may be a bank and a broker, and different entities may play the role of transaction facilitator 10 at different times. The transaction facilitator 10 may help an applicant become pre-qualified and/or guide the applicant through the financing process.

[0040] The originator 24 may "originate" the financing transaction. For instance, the originator 24 may communicate with the applicant 12 and provide financing transaction information to the applicant 12. The applicant 12 may be one or more persons who are interested in a residential real estate financing transaction. For instance, the applicant 12 may be seeking to buy a home, refinance a home, or obtain a home equity line of credit on a home. At various points in time, the applicant 12 may be or become a homeowner and a home seller. Even though the applicant 12 may not own a home prior to the financing transaction, the applicant 12 may be referred to herein as a "homeowner" for the sake of simplicity.

[0041] The transaction facilitator 10 may communicate with the originator 24 and the applicant 12. In some embodiments, the transaction facilitator 10 may be the originator 24. The transaction facilitator may provide financing information to the applicant 12, as further described in FIG. 2.

[0042] Depending on the transaction, there may be a mortgage company 22. For instance, in a home purchase transaction, there may be a mortgage company providing a first mortgage on the house. The mortgage company 22 may communicate with the transaction facilitator 10, applicant 12, and closing agent 18. The closing agent 18 may facilitate the closing (actual settlement) of the financing transaction; the functions of a closing agent 18 are well-known in the art.

[0043] In other embodiments, there may not be a mortgage company or first mortgage. For instance, if an applicant seeks a home equity line of credit on a house owned entirely by the applicant, there will be no mortgage involved. Also, in some embodiments, a homeowner may finance a real estate transaction using a financial instrument according to embodiments of the invention, without additional funds from a mortgage or other financing.

[0044] Investors 14, such as individual and institutional investors, may invest in a fund that holds (owns) one or more financial instrument interests. As further described below, an "financial instrument" ("FIC") may be a security instrument whereby investors provide funds in a real estate transaction in exchange for an equity interest in the underlying real estate. As used herein, the term "financial instrument" may refer to the physical embodiment of the security instrument itself, the legal rights and obligations associated with the security instrument, and the associated contribution value to the financing transaction. As used herein, the owner of the FIC (i.e., the owner of the FIC security) may be referred to as the FIC "owner," FIC "holder," the "institution," or merely the FIC.

[0045] For instance, the fund may own the FIC rights, i.e., the equity interests in one or more specific parcels of residential real estate. The fund may securitize its FIC interests and issue securities to investors, and these securities may be tradeable on a secondary market. The fund may be a mutual fund, a REIT, a private equity fund, or another private or public fund. A securities broker 16 may broker the issuance of the financial instrument security (or securities) to the investors 14. The securities broker 16 may coordinate the subsequent sale of the securities in the secondary market. The securities may be managed by an investment firm 26. The securitization, issuance, and management of real estate-related securities are well-known in the art.

[0046] Although the securities related to the "financial instrument contributions" (or "FICs") are not necessarily identical with FICs, either may be referred to herein as FIC.

[0047] Financial instrument contribution ("FIC")

[0048] The FIC may have any of the following features. The FIC may provide funds in a real estate transaction, such as a home purchase, home refinancing, or home equity line of credit ("HELOC") transaction. For instance, the FIC may provide a predetermined percentage (e.g., 25%) of the price of a home in a home purchase transaction. The FIC may have a maturity date (e.g., five years from the close of the financing transaction). The maturity date may coincide with the end of a loan or other finance component, e.g., a 5-year ARM first mortgage. The FIC may terminate upon maturity, and/or it may also terminate upon another termination event such as a sale of the property, a foreclosure of a first mortgage, a default on a first mortgage payment (or other payment, such as a tax payment), a refinancing, or another disposition of the property or financially significant event concerning the property. As used herein, the ending date of the FIC (upon maturity or other termination event) may be referred to herein as a "termination," "termination event," or "disposition." [0049] The FIC may comprise an equity interest in the property. The FIC may have the right to some or all of the appreciation in the event of a disposition. In some embodiments, the FIC may have a right to only a predetermined percentage of appreciation (i.e., there may be a "cap"), wherein the remaining equity holders (e.g., the homeowner) has the right to any remaining appreciation. For instance, the FIC may have the right to all appreciation up to an amount of 3% per year of appreciation (or another percentage, or another fixed amount in a specified period of time). In this example, if the house realizes only a 2% appreciation over the duration of the FIC, the FIC may have the right to all the appreciation (i.e., the full 2%). If the house realizes a 7% gain over the duration of the FIC, the FIC may receive the equivalent of 3% appreciation, and the remaining appreciation (the appreciation over 3%) may accrue to the homeowner (and/or others who have an interest in the property).

[0050] An appraisal of the value of the property may be required to determine appreciation, e.g., in the event that the FIC matures before a sale.

[0051] Importantly, the FIC may also bear a risk of loss, e.g., along with the homeowner. If the value of the property is below the value of any liens against the property (such as a first mortgage) upon disposition, the FIC holder may be liable for the remainder of the lien. The FIC holder may or may not have recourse against the homeowner. If the value of the property drops to zero, the FIC may lose its entire value. Accordingly, the FIC may be subordinate to a first (or second) mortgage lien against the property. Thus, the FIC may receive its entitled amount upon disposition only after senior creditors are paid (e.g., after the first mortgage company receives the remaining value of the first mortgage).

[0052] Depending on the terms of the FIC, in some embodiments, the FIC holder may have a lien against the property. Upon disposition of the house, the FIC holder may have the right to force a sale of the house in order to redeem the value of the FIC. [0053] The FIC holder may (or may not) have a right to force a sale of the property, "foreclose," or cause another transaction to occur in order to redeem funds owed under the terms of the FIC. For instance, the FIC holder may have a right to foreclose on the property if the homeowner fails to compensate the full value of the FIC upon maturity.

[0054] In some embodiments, the FIC may not have a debt component. There may be no principal loan (an amount owed by the homeowner to the FIC owner) and no interest due (e.g., no interest paid by the homeowner as a result of a loan principal), hi particular, there may be no interest tied to a principal. (However, there may be a "principal" amount of investment, i.e., the equity contributed.) hi this sense, the FIC may be more properly considered "equity" than "debt."

[0055] In other embodiments, the FIC may have debt features. For instance, there may be a nominal interest rate and nominal interest payments. There may also be significant debt features are implemented only after a predetermined period of time or after the occurrence of a predetermined condition (such as a change in the interest rate such as the prime lending rate, e.g., an increase of 2%, an increase above 10%, or a decrease below 5.5%).

[0056] In some embodiments, the FIC may have features of both debt and equity. The instrument may also comprise one or more other financial instruments, each having one or more features of equity and/or debt. Because in many embodiments of the invention the financial instruments may share in both the appreciation and the depreciation of the property, these embodiments of the financial instrument may be considered to be more similar to "equity" than to "debt."

[0057] It should be understood that the embodiments of the invention may applied to a wide variety of instruments with various features and terms that have substantially the same underlying economic features of the embodiments described herein. For instance, it should be appreciated that in substance, there is very little economic difference between an instrument that is 100% equity and an instrument that is 90% equity and 10% debt. Many of the goals of the invention may be achieved using an FIC that has debt (e.g., including a debt principal and interest). When the debt features of an instrument are small compared to the equity, the economic effect of the equity may dramatically outweigh that of the debt. It is contemplated herein that in some embodiments a portion of the FIC may be debt. For instance, 1%, 2%, 3%, 5% and 10% of the total financing contribution may be debt, hi these cases, some of the financial instrument embodiments described herein would still have substantially the same economic properties, hi some cases, debt percentages as high as 20% or even 30% may still yield advantageous results consistent with the invention as described herein. Embodiments that include these features are contemplated herein as embodiments of this invention.

[0058] The homeowner may be (or may not be) financially obligated to pay the FIC owner if the FIC owner fails to recoup its original contribution amount upon disposition of the property.

[0059] In some embodiments, the FIC may not have a tenancy in common, i.e., the FIC holder may not have any right to use or possess the property. Instead, the FIC rights may be strictly financial.

[0060] The FIC may be subordinated to a first mortgage, if any. Thus, as described above, upon disposition the FIC may receive an amount owed under the FIC only after the remaining balance of a first mortgage is satisfied.

[0061] FIG. 2 shows an exemplary system 200 for communicating financing transaction information between an applicant 12 and transaction facilitator 10. The transaction facilitator 10 may comprise a processor 2, database 4, input device 6, and output device 8. The processor 2, database 4, input device 6, and output device 8 may comprise a computer, computer system, server, and/or other data processing means, along with display devices, keyboards, and other associated peripheral devices. [0062] The transaction facilitator may be any entity associated with the real property financing process. For instance, the transaction facilitator may be a mortgage broker, a real estate agent, a title company, a bank, or another financial institution. The transaction facilitator 10 may communicate with an applicant 12 and securities broker 16 via the input device 6 and output device 8. The transaction facilitator 10 may receive financing-related information from the applicant 12 and the securities broker 16. From the securities broker 16 (or other representative of the FIC) the transaction facilitator 10 may receive information regarding the availability of FIC funds, percentages (or other amounts) of FICs, FIC terms, and other information. From the applicant 12 the transaction facilitator 10 may receive information regarding a first mortgage amount, a desired FIC percentage or amount, desired mortgage and/or FIC terms, income data, asset data (e.g., an amount of available cash), tax return data, W-2 data, and personal information (such as social security number and home address).

[0063] The database 4 may store financing-related information and financing parameters, such as: interest rates, closing cost information (including application fees), availability of FIC funds, percentages (or other amounts) of FICs, estimated appreciation growth rates, variance information, neighborhood information, FIC terms, mortgage terms, and other financing transaction information. The database 4 may also store any information received from the transaction facilitator 10 and the applicant 12. As used herein, the term "parameters" refers to any data that is related to the finances of a financing transaction, such as the data listed above (and below).

[0064] The processor 2 may process information received from the applicant 12 and transaction facilitator 10. The processor 2 may also process any information stored in the database 4. The processor 2 may process such data to calculate or determine financing- related data such as financing parameters. For instance, the processor 2 may calculate one or more of the following: closing costs, fees, insurance costs, FIC amounts (e.g., percentages), monthly costs, expected appreciation and/or gain, IRR of the FIC and/or other equity (e.g., a down payment), prepayment penalties, payment schedule, balloon payment information, FIC appreciation growth rate cap, mortgage balance information, and other transaction-related information.

[0065] The output device 8 may comprise a printer, video display device, speaker, or electronic transmission system (e.g., a computer for sending email outputs) for passing information (e.g., processed or calculated data) to the applicant 12 and other entities.

[0066] FIG. 3 shows an exemplary chart showing the relative values of a first mortgage, FIC (also called "equity contribution"), and home value for five years after a home purchase transaction according to an embodiment of the invention. An exemplary home has a purchase price of $ 100,000. Of the purchase price, $75,000 is funded by a first mortgage (75%), and $25,000 is funded by an FIC (25%). The homeowner provides no down payment. The FIC has an appreciation cap of 3% per year. At the end of the fifth year, there is a disposition of the property such as a refinance transaction. This model assumes a 7.5% interest rate over 5 years and a 7% appreciation rate. As a result, at the end of the fifth year, the proceeds of the disposition (e.g., a sale) are $140,255. By this time, the first mortgage amount has decreased from $75,000 to $70,599 as a result of paid-in-capital over five years of monthly mortgage payments by the homeowner. At disposition, the first mortgage is senior to the financial instrument and is paid off first. The FIC is paid second, and it receives its principal investment ($25,000) plus the maximum 3% return on the value of the house ($15,927) for a total of $35,927. The homeowner is entitled to the remainder of the proceeds, which is the paid-in-capital $4401 plus the remaining appreciation ($24,328).

[0067] This example illustrates a main advantage of the invention. Using the FIC contribution, the homeowner was able to purchase and own a home for five years with no down payment, mortgage payments on a 75% mortgage, and accumulate paid-in-capital and excess appreciation above the FIC appreciation cap. Furthermore, the homeowner would be able to take tax deductions on mortgage interest payments, and the homeowner would likely not have to pay mortgage insurance since the loan-to-value is a healthy 75%. (Typically, mortgage insurance is required only if the loan-to-value ("LTV") is higher than 80%.) This scenario may be ideal for first-time homeowners who have little capital for a down-payment.

[0068] FIGS. 4A-4B (i.e., FIGS. 4A-1 through 4B-2) show an exemplary sensitivity analysis of an exemplary financial instrument security according to an embodiment of the invention. The sensitivity analysis shows the financial flow of the funds during a typical 5- year FIC term. FIG. 4A- 1 and FIG. 4A-2 shows the sensitivity analysis, and FIG. 4B- 1 and 4B-2 show definitions of some of the corresponding terms and fields in the analysis. The sensitivity analysis shows such features as the IRR of the FIC, given the assumptions used in the chart.

[0069] FIG. 5 illustrates the difference between a home purchase transaction with and without an exemplary FIC (e.g., as offered by the company Archie Mae), according to an embodiment of the invention. Two scenarios are provided wherein a homeowner purchases a $100,000 house, the house appreciates at 3% per year, and the house is sold at the end of the fifth year, hi the first scenario, the homeowner must borrow 100% of the $100,000 value of the house (because there is no down payment and no FIC). This may be a $100,000 first mortgage or other 100% loan product. After sale, the homeowner keeps the remaining appreciation after transaction costs are paid.

[0070] hi the second scenario, with a 25% contribution from an FIC, the homeowner must borrow only 75% of the $100,000 value of the house. The FIC has a 3% appreciation cap, so the FIC holder takes all of the property's 3% appreciation and the homeowner ends with little cash. However, in the FIC scenario, the homeowner has a significantly lower monthly payment ($654 compared to $822) and a lower net monthly cost of owning a house ($519 compared to $553). [0071] In another (simplified) example contrasting a typical mortgage with an embodiment of the financial instrument (not shown), a $100,000 house may depreciate over five years to $80,000 at a disposition at the end of year five, m the scenario where the full $100,000 purchase price is financed by a 6% fixed-rate mortgage of the homebuyer, the monthly payment may be $599.55. Over the five years prior to disposition, there may be $7079.92 of paid-in capital, and the mortgage company may still be owed $92,920.08 at the end of the fifth year. After an $80,000 sale (due to a $20,000 drop in price of the house), the mortgage holder is still owed $12,920.08. The homeowner is typically personally liable for this amount.

[0072] If the house were instead financed by a $75,000 mortgage and a $25,000 financial contribution according to an embodiment of the invention, the monthly payment drops to $449.66. At the end of five years, there may be approximately $5000 of paid-in capital, and the mortgage may still have an outstanding balance of approximately $70,000 (e.g., subject to gap insurance). However, in this example, a homeowner may pay $8,993.40 less in monthly payments when a financial contribution is used to help finance the home as compared to traditional mortgages, representing nearly $9000 in savings to the homebuyer over the course of five years. At the end of year five, the home may be sold (or refinanced or otherwise disposed) for $80,000 at a loss of $20,000 from the original purchase price. The proceeds of the $80,000 sale may first go to paying off the approximately $70,000 outstanding on the mortgage (assuming the mortgage is senior to the financial instrument according to an embodiment of the invention). Thus, in this circumstance the homeowner may have no liability to the mortgage holder, since the senior mortgage may be paid in full. Other arrangements of seniority may be considered.

[0073] The FIC agreement may specify how losses and gains may be shared (or not shared) between the FIC holder and the homeowner. According to the FIC agreement, the homeowner in the example above may be liable for some or all (or none) of the $15,000 amount. The homeowner may also be liable for amounts greater than those required to redeem the FICs $25,000. For instance, the homeowner may be liable for an amount that would result in the FIC holder realizing a 1% gain (or a fixed dollar gain, such as $5000).

[0074] The remaining $10,000 may be distributed between the remaining interest holders, such as the FIC holder and the homeowner. It may be divided according to a predetermined percentage, such as 50-50, 75-25, 100-0, a split that is based on any amounts contributed to a down payment, or another arrangement. For instance, in a straight 50-50 split, the homeowner may receive $5000, and the holder of the financial instrument may receive $5000. It should be noted that if the holder of the financial instrument effectively put in $25,000 of the purchase price but only returned $5000, then it essentially bears the entire $20,000 loss in home value, hi this sense, the holder of the equity contribution may participate in 100% of the depreciation of the home. In some embodiments, the holder of the equity contribution would receive the entire amount, e.g., the entire remaining $10,000. In such a case, the holder of the equity contribution would effectively contribute $25,000 and receive $10,000, at a loss of $15,000 after five years. The remaining loss in home value (here, approximately $5000) would be effectively born by the homebuyer, who would effectively lose the approximately $5000 value of the paid in capital. Thus, depending on the terms of the financial contribution (e.g., the liability of the homebuyer for any loss or lack of a specified gain), the homebuyer and holder of the financial contribution may effectively participate, in varying degrees, in any decrease in value of the house.

[0075] In some embodiments, the holder of the financial instrument may be limited to a certain absolute or percentage loss (e.g., a depreciation rate) of the value of the original contribution at the time of home purchase. For instance, in this example, the terms of the financial contribution may specify that the homebuyer is liable to the holder of the financial instrument for the full amount of the contribution, a specific percentage of the contribution (e.g., 50% of the contribution), a depreciated amount of the contribution (e.g., the remaining value of the contribution after five years of depreciating at a rate of 3% per year), or an amount higher than the contribution. For instance, in some embodiments, the terms of the financial contribution may stipulate that the homeowner may be liable to ensure a certain return on the investment of the contribution. The terms of such liability may depend on the amount of depreciation of the house. For instance, the homeowner may have liability only up to the amount of paid-in capital, or only to the extent necessary for the contribution to realize a 3% gain per year (or a 3% absolute return).

[0076] It should be noted that the FIC arrangement effectively reduces the risk of the mortgage company. Thus, mortgage insurance may not be required, and for large FIC contributions the mortgage company may reduce the interest rate, thereby further reducing the homeowner's monthly payment and increasing the homeowner's savings compared to traditional methods.

[0077] FIG. 6 illustrates the difference between a traditional home purchase and a home purchase of a more expensive house using an exemplary FIC (e.g., as offered by Archie Mae) according to an embodiment of the invention. The traditional house costs $300,000. With a 25% FIC contribution, the homeowner is able to purchase a house that costs 33% more ($400,000). The monthly mortgage payment is the same in both scenarios ($1611). This illustrates how the use of an FIC allows a homebuyer to "buy-up" to a significantly more expensive house with little or no difference in monthly cost.

[0078] FIG. 7 illustrates the cash flow of an exemplary FIC (e.g., as offered by Archie Mae) through the lifetime of the FIC, according to an embodiment of the invention. Worst- case scenario assumptions are applied here. Even assuming highly adverse circumstances, the FIC still generates an 8.25% IRR, which would be approximately 500 basis points above a typical 5 year U.S. Treasury bill. Thus, FIG. 7 illustrates how an FIC may be a low-risk security instrument with a generous rate of return. [0079] FIG. 8 shows fees for the FIC as an income stream according to an embodiment of the invention. As shown in FIG. 8, the fees generated by using an FIC can generate significant revenue for lender/brokers and issuers.

[0080] FIG. 9 shows a method of effecting a residential property financing transaction according to an embodiment of the invention.

[0081] In step 900, an originator originates a transaction. An originator may find an applicant, provide financing information and counseling to the applicant, and connect the applicant with a transaction facilitator. The originator may market an FIC financing product.

[0082] In step 910, an applicant passes first personal and/or financing-related information to the transaction facilitator. This information is discussed above. The applicant may provide such information orally or by writing, e.g., by entering information at a computer terminal and transmitting it electronically to the transaction facilitator. As discussed above, the transaction facilitator may comprise various means for automating communications and processing data, such as a computer system.

[0083] hi step 920, the transaction facilitator processes information, e.g., the information received from the applicant. The transaction facilitator may also store other data as discussed above. Processing information may comprise calculating parameters as discussed above.

[0084] In step 930, the transaction facilitator determines whether the applicant is eligible for a financial instrument. In making this determination, the FIC may take into account such factors as FIC preferences and terms, applicant financial information such as income and assets, and property information such as price. For instance, the transaction facilitator may determine that the applicant is not eligible for an FIC due to a low credit rating. If the transaction facilitator determines that the applicant is not eligible for an FIC financial instrument, it may end the process or attempt to find a different financial product. [0085] It should be noted that an FIC may exist prior to this step, or an FIC may be created after this step. Also, there may be a variety of FICs to choose from. The transaction facilitator may make the determination of step 930 (as well as other determinations and calculations described herein) for a variety of different FICs, which may have different contribution amounts/percentages, maturity dates, and other terms.

[0086] In step 940, the transaction facilitator determines transaction parameters. Here, the transaction facilitator may calculate any of the parameters (as discussed above) using transaction-related information (as discussed above).

[0087] In step 950, the transaction facilitator outputs transaction parameters. For instance, it may print out (or display on a video display) monthly payments, closing costs, and other parameters. These may comprise an estimate or "quote" of costs and other parameters, e.g., for closing. Any means of communicating information (via email, Internet, paper, etc.) are contemplated herein.

[0088] In step 960, the applicant passes second personal and/or property-related information (or transaction information) to the transaction facilitator. This second instance of providing information may be necessary for a more formal "quote." For instance, the second information may comprise bank statements or other information that may not have been provided in step 910.

[0089] In step 970, the transaction facilitator determines either an approval and a rate or a decline decision. The rate may be a locked-in interest rate guaranteed by a bank.

[0090] In step 980, the applicant receives the decision, via any communication means.

[0091] In step 990, the applicant executes financing transaction documents. For instance, the applicant may execute a deed, purchase agreement, mortgage, lien, and/or other financing-related documents. At this time, the FIC documents may also be executed in order to fund the transaction using proceeds from the FIC. [0092] In step 1000, applicant inquiries are serviced. I.e., the financing agreement is serviced by a servicing agent, such as a mortgage company or an agent of the FIC.

[0093] In step 1010, the applicant sends a final payment to fulfill the financing obligations of the FIC. This step may occur at maturity or another termination date. The FIC may be satisfied as described above.

[0094] During the course of this process, a monthly payment and other values may be calculated. For instance, a monthly mortgage payment may be calculated based on a mortgage principal that based on subtracting a financial contribution from the purchase price of a house. The monthly payment may be determined from this adjusted value using traditional methods, e.g., methods that include accounting for property tax, property insurance, and also mortgage insurance (e.g., if there is less than 20% of a down payment including the financial contribution).

[0095] It should be noted that another party, such as another homebuyer (who is purchasing the property), a mortgage company, a bank, or another entity may pay the funds to satisfy the FIC instead of the applicant.

[0096] The process may also involve well-known steps used in marketing, creating, and securitizing financial instruments backed by real property, such as traditional mortgages and SAMs.

[0097] Other features of systems and methods for financing real property are contemplated herein. For instance, the features disclosed in U.S. Patent No. 6,345,262 to Madden and U.S. Patent No. 5,983,206 to Oppenheimer are contemplated herein, and the disclosures of those patents are incorporated herein by reference.

[0098] The embodiments of the present inventions are not to be limited in scope by the specific embodiments described herein. For example, although many of the embodiments disclosed herein have been described with reference to real property, the principles herein are equally applicable to other assets. Indeed, various modifications of the embodiments of the present inventions, in addition to those described herein, will be apparent to those of ordinary skill in the art from the foregoing description and accompanying drawings. Thus, such modifications are intended to fall within the scope of the following appended claims. Further, although some of the embodiments of the present invention have been described herein in the context of a particular implementation in a particular environment for a particular purpose, those of ordinary skill in the art will recognize that its usefulness may not be limited thereto and that the embodiments of the present inventions can be beneficially implemented in any number of environments for any number of purposes. Accordingly, the claims set forth below should be construed in view of the full breath and spirit of the embodiments of the present inventions as disclosed herein.

Claims

CLAIMSWhat is claimed is:

1. A method of providing funding data for a residential real estate transaction funded at least in part by a financial instrument, comprising: receiving from an applicant a request for financing data in connection with a transaction involving residential real estate, wherein the transaction is one of a purchase, refinancing, and equity line of credit transaction; calculating one or more terms of a financial instrument to fund the transaction in whole or in part, wherein the financial instrument substantially has no associated periodic interest payment and is structured so that its return on investment will include all or a portion of appreciation if the residential real estate has appreciated in value at the time of termination of the financial instrument; and providing financing data to the applicant based on the calculating action.

2. The method of claim 1, wherein the financial instrument is secured by a lien against the residential real estate subordinate to a first mortgage lien against the residential real estate.

3. The method of claim 1, wherein the financial instrument has a predetermined maximum percentage yield.

4. The method of claim 1, wherein the financial instrument is further structured so that it earns 100% of any property appreciation up to a predetermined percentage yield.

5. The method of claim 1, wherein the financial instrument is further structured so that its maximum return on investment is the initial investment amount if the residential real estate has not appreciated in value at the time of termination of the financial instrument.

6. The method of claim 1, wherein the financial instrument is structured to participate in any depreciation of the residential real estate.

7. The method of claim 1, wherein the financial instrument substantially substitutes a series of interest payments for all or a portion of any appreciation of the residential real estate

8. The method of claim 1, wherein the financial instrument contributes an amount equal to approximately 15-25% of the purchase price of the real estate.

9. The method of claim 1 , further comprising: receiving an application fee from the applicant.

10. The method of claim 1, wherein the financial instrument has a predetermined maturity date.

11. The method of claim 1 , wherein the financial instrument is funded by a at least one of a mutual fund, a REIT, and a private equity fund that issues securities secured by an equity interest in the residential real estate of the financial instrument.

12. The method of claim 1, wherein the financial instrument is structured so that the applicant would owe substantially no predetermined interest payments to the holder of the financial instrument.

13. The method of claim 1, wherein the transaction is a home purchase, approximately 25% of the purchase price of the home is provided by the financial instrument, and the remaining approximately 75% of the purchase price funds are shared between the applicant and a first mortgage.

14. The method of claim 1, wherein the financial instrument comprises a debt feature that has a present value of less than 5% of the present value of the financial instrument.

15. The method of claim 1, further comprising: inputting into a central processor transaction data, wherein the transaction data comprises at least one of a maximum appreciation of the financial instrument, a dollar amount associated with the transaction, and a portion of the dollar amount to be contributed by the financial instrument; generating monthly payment rate data and initial financing obligation data using a computer processor; and generating at an electronic display device a representation of the monthly payment rate data and initial financing obligation data.

16. A method of issuing a security, comprising: receiving a request to purchase an interest in a financial instrument, wherein the financial instrument is used to fund at least one of a purchase, refinancing, and equity line of credit transaction for residential real estate, and wherein the financial instrument substantially has no associated periodic interest payment and is structured so that its return on investment will include all or a portion of appreciation if the residential real estate has appreciated in value at the time of termination of the financial instrument; issuing the interest to a buyer in a secondary market, wherein the interest is issued by a fund that holds a plurality of financial instruments; and receiving a purchase price of the funds in connection with the issuing action.

17. A system for providing funding data for a residential real estate transaction funded at least in part by a financial instrument, comprising: an input device for receiving from an applicant a request for funding data in connection with a transaction involving residential real estate, wherein the transaction is one of a purchase, refinancing, and equity line of credit transaction; a processor for calculating a financial instrument to fund the transaction, wherein the processor is configured to calculate monthly payment information associated with the transaction, and wherein the financial instrument substantially has no associated periodic interest payment and is structured so that its return on investment will include all or a portion of appreciation if the residential real estate has appreciated in value at the time of termination of the financial instrument, wherein the processor may also generate funding data based on the calculating action; and an output device for outputting the monthly payment information.

18. The system of claim 18, wherein the financial instrument contributes an initial investment amount to the transaction, and wherein the financial instrument is further structured so that its maximum return on investment is the initial investment amount if the residential real estate has not appreciated in value at the time of termination of the financial instrument.

19. The system of claim 18, wherein the financial instrument substantially substitutes a series of interest payments for all or a portion of any appreciation of the residential real estate.