Mortgage abstract
A computer system and computerimplemented process creates single
mortgage documents with multipart obligations. The obligations
allow for financing of real property ownership through a combination
of mortgage debt and equity participation in underlying real property
values. The computer system includes components for issuance, origination,
servicing, and settlement of the mortgage. The issuance process
allows for the input of parameters or financial terms for the creation
of new mortgage instruments. Origination provides for the quotation
of monthly payment rates and initial financing obligations to perspective
mortgagors and printing of mortgage agreements under those terms.
Servicing includes the processing of mortgage payments and periodic
statements to mortgagors from the inception of the mortgage through
termination, at which time the system determines a final settlement
of the mortgagor and mortgagee obligations.
Mortgage claims
I claim:
1. A computerimplemented method of producing a digital representation
of mortgage issuer parameters for a prospective mortgage on a real
property, the prospective mortgage including a first part and a
second part, wherein the first part defines a first debt obligation
mortgage obligations between a mortgagor and a first mortgagee and
a second part defining mortgage obligations between the mortgagor
and a second mortgagee, the computerimplemented method comprising:
receiving, through an input device of a computer, mortgage issuer
parameters that include durations and return rates of prospective
mortgage obligations of the first part of the mortgage and durations
and return rates of prospective mortgage obligations of the second
part of the mortgage;
storing on a computerreadable memory the mortgage issuer parameters;
generating, using the computer, more mortgage issuer parameters
derived from received mortgage issuer parameters, both the received
and derived mortgager issuer parameters to be applied to mortgagor
application data to determine prospective mortgage terms including
payment obligations of the mortgagor to the first and second mortgagees
for a duration of the mortgage; and
producing, using the computer, a digital representation of the
mortgage issuer parameters.
2. The computerimplemented method of claim 1, wherein the second
part of the mortgage includes a debt component and a shared equity
component, the shared equity component representing an equity interest
in the real property of the second mortgagee.
3. The computerimplemented method of claim 2, wherein the received
mortgage issuer parameters further define a percentage in a value
of the real property of the equity interest of the second mortgagee.
4. A computerimplemented method of producing a digital representation
of a mortgage on a real property as defined by terms of the mortgage,
the mortgage including a first part defining obligations between
a mortgagor and a first mortgagee and a second part defining obligations
between the mortgagor and a second mortgagee, the computerimplemented
method comprising:
accessing, from a computerreadable memory, mortgage issuer parameters
including investment return rates, a duration of a first debt obligation
of the mortgagor to the first mortgagee, and a duration of a second
debt obligation of the mortgagor to the first mortgagee;
receiving, through an input device of a computer, mortgage application
data including a value of the real estate at an inception of the
mortgage and a percent of the value of the real estate to be paid
by the mortgagor in a down payment;
storing the mortgage application data on a computerreadable medium;
generating, using a computer, terms of the mortgage by applying
the mortgage issuer parameters to the mortgage application data,
wherein the terms define the first debt obligation and the second
debt obligation; and
producing a digital representation of the mortgage terms.
5. The computerimplemented method of claim 4, further comprising:
storing the mortgage defined by the mortgage terms on a memory
storage device.
6. The computerimplemented method of claim 4, wherein the second
part of the mortgage includes the second debt obligation and a shared
equity obligation defined by terms of the mortgage, the shared equity
obligation representing an interest in the equity of the real property
belonging to the second mortgagee.
7. The computerimplemented method of claim 6, wherein the mortgage
issuer parameters further define a percentage of the equity of the
real property belonging to the equity interest of the second mortgagee.
8. The computerimplemented method of claim 4, further comprising:
receiving, through an input device of a computer, hypothetical
termination variables that represent hypothetical values associated
with the mortgage at a termination of the mortgage, the termination
variables including a duration of the mortgage and net proceeds
from a disposition of the real property at a termination, wherein
the duration of the mortgage is an amount of time from the inception
of the mortgage until the termination of the mortgage;
calculating proforma termination obligations by applying the termination
variables to the terms of the mortgage, the termination obligations
including a first payment owed by the mortgagor to the first mortgagee
and a second payment owed by the mortgagor to the second mortgagee
at the time of termination.
9. The computerimplemented method of claim 8, wherein:
the second part of the mortgage includes the second debt obligation
and a shared equity obligation defined by the terms of the mortgage,
the shared equity obligation representing an interest in the equity
of the real property belonging to the second mortgagee;
the mortgage issuer parameters further define a percentage of the
equity of the real property belonging to the equity interest of
the second mortgagee; and
the step of calculating proforma termination obligations includes
determining a value of the equity interest of the second mortgagee
at termination.
10. The computerimplemented method of claim 9, wherein the mortgage
application data includes a house price index at the inception of
the mortgage, and the termination variables include the house price
index at the termination of the mortgage,
wherein determining the value of the equity interest of the second
mortgagee includes:
producing a ratio by dividing the house price index at the termination
by the house price index at the inception;
determining a value of the real estate at termination by multiplying
the ratio by the value of the real estate at inception;
determining the equity of the real estate at termination by subtracting
the debt obligations of the mortgagor to the first mortgagee and
to the second mortgagee from the value of the real estate at termination;
and
calculating the value of the equity interest of the second mortgagee
by multiplying the equity of the real estate at termination by the
percentage of the equity of the real property belonging to the equity
interest of the second mortgagee.
11. The computerimplemented method of claim 4, wherein the terms
of the mortgage include a crossdefault provision that provides
that in the event of a termination of the mortgage and a sale of
the real property for a price less than a combined amount of unpaid
obligations to the first and second mortgagees, the first and second
mortgagee will each receive a prorata share of proceeds of the
sale, each prorate share based on the unpaid obligation of the
mortgagee to the first and second mortgagee, respectively.
12. A computerimplemented method of servicing a mortgage on real
property defined by terms of the mortgage and represented digitally,
the mortgage including a first part defining obligations between
a mortgagor and a first mortgagee and having a first balance and
a second part defining obligations between the mortgagor and a second
mortgagee and having a second balance, the computerimplemented
method comprising:
receiving, through an input device of a computer, an indication
of receipt of a mortgage payment, the indication including an amount
of the mortgage payment; and
adjusting, using the computer, the first balance or the second
balance according to the terms of the mortgage by deducting the
amount of the mortgage payment from either the first balance or
the second balance, respectively.
13. The computerimplemented method of claim 12, further comprising:
producing a mortgage statement on a medium, the mortgage statement
reflecting any adjustments to the mortgage balances resulting from
the servicing of mortgage.
14. The computerimplemented method of claim 12, further comprising:
storing the serviced mortgage on a memory storage device.
15. The computerimplemented method of claim 12, further comprising:
determining if a late charge should be assessed; and
if a late charge should be assessed, adding the late charge to
either the first balance or the second balance, respectively, according
to terms of the mortgage.
16. The computerimplemented method of claim 12, wherein the second
part of the mortgage includes a debt obligation and a shared equity
obligation defined by the terms of the mortgage, the shared equity
obligation representing an interest in the equity of the real property
belonging to the second mortgagee.
17. The computerimplemented method of claim 16, the method further
comprising:
determining a value of the equity interest of the second mortgagee;
and
producing a mortgage statement on a medium,
wherein the mortgage statement reflects any adjustments to the
mortgage balances resulting from the servicing of mortgage and the
value of the equity interest of the second mortgagee.
18. The computerimplemented method of claim 17, wherein the value
of the equity interest of the second mortgagee has increased as
a result of the mortgage payment.
19. A computerimplemented method of determining payments owed
by a mortgagor to a first mortgagee and to a second mortgagee at
a termination of a mortgage on real property in accordance with
terms of the mortgage, the mortgage represented digitally on a digital
storage medium and including a first part defining obligations between
the mortgagor and the first mortgagee and a second part defining
obligations between the mortgagor and the second mortgagee, the
computerimplemented method comprising:
accessing the terms of the mortgage on the digital storage medium,
wherein the first part includes a first debt obligation of the mortgagee
to the first mortgagor and the second part includes a second debt
obligation of the mortgagor to the second mortgagee;
determining a first balance of the first debt obligation;
determining the second balance of the second debt obligation;
receiving, through an input device of the computer, an indication
of net proceeds from disposition of the real property at the termination;
determining, from the net proceeds and the first balance, a first
payment owed to the first mortgagor;
determining, from the net proceeds, the first payment owed, and
the second balance, a second payment owed to the second mortgagor.
20. The computerimplemented method of claim 19, further comprising
the step of:
producing a representation of the first and second payments owed
on a media.
21. The computerimplemented method of claim 19, wherein the second
part of the mortgage further includes a shared equity obligation
defined by terms of the mortgage, the shared equity obligation representing
an interest in the equity of the real property belonging to the
second mortgagee.
22. The computerimplemented method of claim 21, wherein the mortgage
terms define a percentage of the equity of the real property belonging
to the equity interest of the second mortgagee.
23. The computerimplemented method of claim 22, further comprising:
determining a value of the equity interest of the second mortgagee
at termination.
24. The computerimplemented method of claim 23, wherein the terms
of the mortgage define a house price index at the inception of the
mortgage and a value of the real estate at an inception of the mortgage,
the method further comprising:
receiving a house price index at the termination of the mortgage,
wherein the step of determining the value of the equity interest
of the second mortgagee includes:
producing a ratio by dividing the house price index at the termination
by the house price index at the inception;
determining a value of the real estate at termination as a product
of the ratio and the value of the real estate at the inception;
determining the equity of the real estate at termination by subtracting
the first balance and the second balance from the value of the real
estate at termination; and
calculating the value of the equity interest of the second mortgagee
by multiplying the equity of the real estate at termination by the
percentage of the equity of the real property belonging to the equity
interest of the second mortgagee.
25. The computerimplemented method of claim 24, wherein the mortgage
terms define a percentage selling commission allowance, wherein
the step of determining a value of the real estate at termination
includes:
multiplying the product of the ratio and the value of the real
estate at the inception by the selling commission allowance.
26. The computerimplemented method of claim 23, wherein the terms
of the mortgage include a capitation value, wherein the step of
determining the value of the equity interest of the second mortgagee
at termination includes:
limiting a maximum value of the equity interest to the capitation
value.
27. The computerimplemented method of claim 26, wherein the terms
of the mortgage include a capitation time limit, wherein the step
of determining the value of the equity interest of the second mortgagee
includes:
determining whether a duration of the mortgage from an inception
to the termination has exceeded the capitation time limit; and
if the duration has exceeded the time limit, forgoing the limiting
the maximum value of the equity interest to the capitation value.
28. The computerimplemented method of claim 19, wherein the terms
of the mortgage define a crossdefault provision providing that
in the event of a termination of the mortgage and a sale of the
real property for a price less than a combined amount of the first
balance and second balance, the first payment and the second payment
are equal to prorata shares of proceeds of the sale based on the
first balance and second balance, respectively,
wherein if the received net proceeds are less than the combined
amount of the first balance and the second balance, the steps of
determining the first payment and the second payment each include
applying the crossdefault provision.
Mortgage description
FIELD OF THE INVENTION
This invention relates to the financing of real property, primarily
residential housing. More particularly, the present invention pertains
to a process of and method for creating single mortgage documents
with multipart obligations, one of which finances real property
ownership through a combination of mortgage debt and equity participation
in underlying real property values.
BACKGROUND OF THE INVENTION
Traditionally, residential mortgage lending has involved a twofold
evaluation of the loan repayment ability of prospective homeowners
and mortgage applicants. This process encompasses a simultaneous
assessment of: 1) payment affordability (i.e., the percentage of
applicant income required to make monthly mortgage payments) and
2) underlying collateral value in case of foreclosure and resale
(i.e., LoanToValue ratios: the ratio of principal obligation to
appraised house value). Together, these factors have formed the
credit risk of mortgage lending.
Before the last two decades, mortgage lenders assumed that fixed
mortgage loan payments, calculated at fixed nominal rates of interest
over typical lives of fifteen to thirty year loans, would provide
them a fixed, but reliable, financial return on their capital. These
lenders implicitly relied upon a continuation of low and stable
inflation and interest rates over the entire life of their mortgage
loans.
Events during the 1970s, however, dramatically altered this assumption.
The market value of outstanding mortgage loans, with their lower
and fixed rates and long maturities, were now seriously eroded by
enormous surges in inflation and interest rates during this period.
Tied into fixed low interestbearing loans over extended repayment
periods, lenders discovered a new financial return, or interest
rate, risk now inherent in all mortgage lending.
At the same time, moreover, house prices increased dramatically,
not only as an immediate result of inflation, but as a perfect hedge
against further inflation. Prospective new homeowners now faced
the prospect of dramatically larger and typically unaffordable mortgage
payments. This resulted, not only from the repayment of higher principal
balances on much higherpriced housing, but the compounding effect
of higher mortgage interest rates on the higher mortgage principal.
Since fewer people could afford these higher payments, fewer prospective
homeowners could meet the credit (or affordability) criteria of
mortgage lenders.
A number of new mortgage instruments, generally termed Adjustable
Rate Mortgages (ARMs), arose that shifted the interest rate risk
to borrowers, but did not solve the real financing problems. Lenders,
faced with the uncertainty of future inflation and interest rates
eroding the value of prospective loans, offered mortgages wherein
monthly payments would vary based upon changes in future interest
rate indices as generally tied to federal fund rates. These instruments
used the indices as proxies for adjustments to new levels of interest
cost owed and payable by the homeowner or, equivalently, rates of
return required by the lender.
One kind of instrument, the Shared Appreciation Mortgage (SAM),
transferred the interest rate risk to homeowners by offering fixed
lower interest rates and monthly mortgage payments in return for
a share in any appreciation in the mortgaged house. The lender,
however, did not reciprocally share with the homeowners any losses
on the value of the house over the mortgage duration.
These mortgages proved unmarketable for several reasons. First
of all, the SAM required a costly and uncertain specific house appraisal
to determine the lender's share, if any, of appreciation after forced
refinancing in ten years. Secondly, the homeowner had to refinance,
not only the remaining mortgage principal, but original lender's
share of appreciation. Finally, the homeowner had no way of fixing,
at the inception of the SAM mortgage, his monthly mortgage payment
obligations after the initial ten year refinancing.
None of these new mortgage instruments, however, have done anything
to address the underlying mortgage financing problems of insuring:
1) low and affordable monthly mortgage payments, 2) certainty in
the amount of those payments over the life of the loan and 3) adequate
financial returns to mortgage lenders in all future inflation and
interest rate environments.
First of all, neither conventional fixed rate or ARM instruments
provide a mechanism for actually funding higher borrowed principal
and interest rates with lower monthly payments. As such, they cannot
solve the first and most important problem, affordability.
Conventional fixed rate mortgages and ARMs alternately solve the
second and third problems, but only by exacerbating the other. Fixed
rate mortgages guarantee fixed payments, but only by exposing the
lender to the interest rate risk over the lives of these loans.
And while ARMs partially guarantee financial returns, they do so
only by exposing the borrower to unknown and perhaps unaffordable
future mortgage obligations. Therefore, certainty (against interest
rate risk) for lenders (through ARMs) means uncertainty in payment
for borrowers. And certainty in payment for borrowers (through fixed
rate mortgages) means uncertainty (or interest rate risk) for lenders.
Moreover, ARMs can only really partially shift the interest rate
risk and uncertainty to borrowers for several reasons. First of
all, ARMs can be unmarketable in interest rate environments generally
perceived as temporally low relative to the anticipated future.
Just when lenders want interest rate protection against the future,
borrowers baulk at the prospect of higher future payments under
ARMs. Secondly, even if borrowers accept these loans, they may be
unable to make higher monthly payments in the future. As such, the
lender may be forced to foreclose and resell the house at a loss
in the very housing finance market that led to original foreclosure.
Finally, mortgages are uniquely homeowner, not lender, callable.
After making modest penalty payments, the homeowner can refinance
the mortgage loan in interest rate markets of his own choosing.
The lender has no such equal election. In mortgage capital markets,
this creates what is termed "negative convexity:" i.e.,
high rates of return do not persist (because of homeowner refinancings),
while low rates do (because of fewer sales and no refinancings).
It is the primary object of the invention to create a process and
method which simultaneously solves all of the home financing problems
as outlined above. The invention accomplishes this by uniquely separating
the legal notion of "ownership" between that of rights
to "use and possession" and "equity investment."
In mortgage agreements created with the subject invention the homeowner
retains the traditional right of use and possession. But he now
immediately surrenders a fixed equity share in the house to a new
Joint Venture Partner (JVP). The invention is a system to calculate
the estimated future value of the JVP share and other payments from
inception of the loan through termination in order to assure a financial
rate of return sufficient to attract mortgage investors (mortgagees).
The Joint Venture Partner is one of two sources of mortgage capital
now financing homeowner purchase. Under a new single first mortgage
(with a "cross default" provision in the case of foreclosure)
there are two separate sections. The first, Section A, is a conventional
mortgage loan (i.e., fixed rate mortgage or, alternately, an ARM).
Section B is the homeowner's new Joint Venture Partner, who, in
return for partial financing, obtains a substantial and fixed share
in the value of the house from inception to termination of the agreement.
At the end of the agreement (through sale, normal termination or
foreclosure), the homeowner repays his Joint Venture Partner for
his share of the house.
The instruments produced under the new invention simultaneously
lower payments, fix amounts throughout the life of the new mortgages,
and allow the homeowner to effectively defer some of the payment
to termination. Since the latter amount will vary based upon the
level of inflation and house prices during the course of the agreement,
this also insures that the financial return on the JVP's investment
reflects actual investment requirements. If inflation is high, the
JVP will receive a larger amount. If low, the JVP receives a lower
amount. As mutual investors, however, they both have an interest
in house appreciation. Their interests are not competing as under
conventional fixed vs. ARM loans, but fully aligned.
It is a further object of the invention to create a new twosection
single first mortgage, which creates two new investment vehicles
in one instrument. While the mortgage capital source can purchase
and hold both Section A and B of the single mortgage, they can also
be sold separately or accumulated as the collateral for mortgagebacked
securities. The Section A part is ideal for traditional mortgage
capital sources because it embodies the elements of conventional
loan agreements. Section B is ideal for longterm investors, such
as pension funds, who want long maturities with hedges against erosion
in investment values due to inflation.
It is another object of the invention to restabilize all aspects
of the residential construction and financing markets. Alternate
"booms" and "busts" currently plague these industries
because small changes in interest rates dramatically expand or alternately
contract the pool of prospective homeowners. Builders commencing
construction in low interest rate markets often are forced to sell
houses quickly and at a loss to repay construction loans after rates
have increased during construction. Similarly, homeowners often
cannot sell their houses at all during these periods of high interest
rates.
The invention solves this problems by largely insulating prospective
homeowners from current interest rate levels. Both home builders
and home sellers now have the opportunity to become Joint Venture
Partners with prospective buyers by effectively repurchasing a share
in houses financed through this mortgage. Instead of absorbing losses
under forced sale, they temporarily repurchase and equity interest
and can resell the JVP Section equity to permanent investors.
It is still another object of the invention to facilitate new ownership
opportunities for renters by effectively lowering the operating
costs of landlords. Currently, landlords must set rents at levels
to cover both costs of maintenance and upkeep and damage upon lease
expiration. Under mortgages created by the new invention, these
costs are either eliminated or willingly absorbed by the current
renters (or new owners), who are newly invested in the upkeep and
future value of the occupied property. As such, this invention provides
a more costeffective and affordable ownership option to renters
than traditional condominium conversion. The above also applies
to landlords who rent single family dwellings as well as commercial
real estate.
SUMMARY OF THE INVENTION
This invention creates new mortgage instruments through the use
of a computer system that embodies a process of and method for calculating
payment obligations which simultaneously and uniquely:
1) provide substantially lower (and optionally fixed) monthly payments
to prospective owners of real property than conventional mortgage
documents,
2) create, through an equity share in real property, the opportunity
for higher rates of return to mortgagees and the ability to assure
preservation of those returns under varying inflation and interest
rate environments during the life of these mortgages,
3) develop a new single first mortgage with two parts, Section
A and B, (under a "crossdefault" provision in the event
of foreclosure), which can be separately marketable or collateralized
within mortgagebacked securities.
The novelty of the invention is its mechanism for guaranteeing
substantially lower homeowner payments, while simultaneously assuring
attractive and safe financial returns to mortgage investors. This
is accomplished by having the prospective homeowner (mortgagor)
become both part borrower and part joint equity venturer with the
mortgagee. Whenever a prospective home purchaser applies for credit
under the terms of the new mortgage, the invention, through calculations
performed by a computer, determines the required downpayment and
Section A and B principal to finance purchase under assumptions
of current market interest rates and projected increases in house
prices. The computer system then calculates and prints the monthly
payment obligations of the mortgagor.
Of the total principal normally required to finance purchase, the
homeowner only borrows part of this amount from Section A. This
section has the characteristics of conventional fixedrate (or,
alternatively, ARM) loans and is separately marketable as such.
The homeowner makes monthly payments only on the Section A principal
for the first years, usually fifteen, completely paying off the
principal obligation at the end of this time. The Section A mortgage
is not separate mortgage, however, but one part of a twopart instrument,
which are only issuable together.
Section B principal has two parts: debt and joint venture equity.
The debt principal reflects the amount of capital contributed to
the house financing by Section B (i.e., house price, less down payment
and Section A principal). The Section B debt principal, which remains
unpaid until the Section A obligations are terminated, is then paid
off over the last years of the usual 20 year mortgage. (These payments
approximately equal the same monthly payments made under Section
A.) The value of Section B's equity share also increases over the
life of the mortgage because the Section A mortgage payments, by
reducing the Section A principal, also increases the net equity
of both joint venture partners: homeowner and the Section B holder.
Since Section B must typically wait 15 years before receiving any
repayment, the primary financial return is Section B's Joint Venture
Partner equity in the value of the house. As a true JVP the Section
B holder shares in the total value of the house, including any appreciation
(or depreciation) in its value, at its equity percentage, typically
50%. The value of the JVP share is calculated by using a change
in a local house price index as a proxy for the change in house
value and multiplying the percent JVP share times this amount. If
termination occurs within a certain time period from inception,
there is an additional cap or limit calculation to assure that the
total Section B return on investment does not exceed a stated maximum
percent.
The homeowner can sell or refinance the house at any time, allow
the agreement to terminate at the end of its stated term or otherwise
face foreclosure during its term. In all these settlement cases,
the proceeds of the sale are compared first with the outstanding
principal obligations of both Section A and B. For Section A this
is simply the outstanding debt principal. For Section B it is the
sum of the outstanding debt principal and the value of its joint
venture equity share. If the proceeds of the sale are less than
the outstanding Section A and B principal (i.e., in foreclosure),
the crossdefault provision applies. The proceeds are used to repay
Section A and B only and in proportion to their principal balances.
If the proceeds are greater, Section A and B are fully repaid with
the balance of any proceeds going fully to the homeowner.
The mortgage system, embodied within a computer, includes the following
components: 1) issuance, 2) origination, 3) servicing, and 4) settlement.
The issuance process allows for the input of parameters or financial
terms for the creation of new mortgage instruments. This process
assures that mortgagees will receive rates of return sufficient
to attract the issuer's mortgage capital. Origination provides for
the quotation of monthly payment rates and initial financing obligations
to prospective mortgagors and printing of mortgage agreements under
those terms. Servicing includes the processing of mortgage payments
and printing periodic statements to mortgagors from inception of
the mortgage through termination, at which time the system calculates
a final settlement of mortgagor and mortgagee obligations.
BRIEF DESCRIPTION OF THE DRAWING
These and other aspects and advantages of the present invention
are explained in the detailed description and claims which make
reference to the accompanying tables, diagrams and flowcharts as
one embodiment of a system in accordance with the present invention.
FIG. 1 is a schematic diagram depicting the overall computer system
used in one embodiment of the invention.
FIGS. 2A through 2D are schematic flowcharts depicting one embodiment
of the computer system structure and processes in accordance with
the principles of the invention. These are organized within the
computer system components of: issuance (FIG. 2A), origination (FIG.
2B), servicing (FIG. 2C) and settlement (FIG. 2D).
FIG. 3 is a schematic flowchart depicting in more detail the actual
and proforma mortgage settlement calculations referenced in FIG.
2. The settlement process is used, not only within the settlement
process (in FIG. 2D), but also in origination (FIG. 2B) and servicing
(FIG. 2C) as well.
In addition, there are a series of tables which both define input
and output variables used in the above processes and show sample
calculations as follows:
Table 1 defines all input and output variables used in one embodiment
of the system. All variables in the Table include: an alphabetic
reference or abbreviation, a verbal definition, sample data used
in an example calculation (as referenced in the tables below) and
a complete specification of its definition and use relative to other
variables. The specification of some of these variables reference
financial functions which are more fully defined at the end of the
Table.
Table 2 shows an example of output produced by the system. This
output uses the sample data for each variable as per Table 1 above
and demonstrates the issuance, origination and settlement processes
in one embodiment of the system.
Table 2A presents the same output as Table 2, but uses the alphabetic
variable abbreviations from Table 1 in place of the sample data
from Table 2 to facilitate exact reference of variable use from
Table 1 to the sample output in Table 2.
Table 3 shows an example of a statement produced periodically for
the mortgagee as part of the servicing process. The example references
the same data from Table 1.
Table 3A presents the same output as Table 3, but uses the alphabetic
variable abbreviations from Table 1 in place of the sample data
from Table 3 to facilitate exact reference of variable use from
Table 1 to the sample output of Table 3.
DETAILED DESCRIPTION OF THE INVENTION
The new mortgage system is a process of and method for issuing,
originating, servicing, and settling singleissue, multipart mortgage
documents, where one of these mortgage obligations provides for
a mortgagee equity interest. FIG. 2 depicts each component of the
system and Table 1 lists and defines all input and output variables
used therein and, additionally in the case of output variables,
the calculations of same. Together, Tables 1 through 3 demonstrate
an example of the calculations embodied in the system and output
available.
The following is an overview of the system as summarized in FIG.
2, including an outline of the major data, processes and uses of
the system.
Issuance allows for authorized sources to input different parameters
for the creation of these new mortgage instruments. These parameters
reflect the overall term of the instrument and the investment return
requirements of both Section A and Section B mortgagees. Additionally,
two parameters dictate assumable levels of credit risk on prospective
mortgagors: percentage of minimum down payment and the maximum Section
B Joint Venture equity share. Both of these parameters insure that
the prospective homeowner has an adequate financial stake or equity
in his or her own home. There are two additional factors specific
to Section B. An investment return limit or cap of variable percent
and applicable period from inception prevents an excessive return
to Section B for early mortgage terminations. The last factor, the
Selling Allowance, may provide for a Section B variable percentage
sharing of the cost of house sale at termination.
All of the above factors are fully described in Table 1 in the
"Issuer Input Variables" section. The system then converts
these variables into "Issuer Output Variables" as defined
in the same Table 1. These are largely transformations of annual
interest and term parameters to be on a monthly basis for use in
later calculations. Once this process is completed, the system then
produces an output media (a diskette in the preferred embodiment,
but may include electronic transmission) for transmittal to contracting
originators. The diskette includes all values for the above variables
and the computer system itself.
Contracting originators then receive and input mortgage application
data into the system. This data, referenced as "Inception Input
Variables" in Table 1, includes the mortgagorspecific parameters
of: 1) house purchase price, 2) actual homeowner percent down payment,
and 3) the house price index in the locality of the house. This
provides for the quotation of monthly payment rates and initial
financing obligations to prospective mortgagors and, if accepted
by homeowners, printing of mortgage agreements under those terms.
As part of the origination process, the system can also calculate
proforma settlement results based on additional input parameters,
referred to as "Termination Input Variables." Prospective
mortgagors can, therefore, assess the value of his or her share
of the house at termination and the future value of the savings
in monthly mortgage payment over conventional loans under termination
assumptions of homeowner choosing.
For all mortgages written under the above origination process,
the system stores all of the above data on new mortgages, except
proforma termination data, in a mortgage master file. Mortgages
are then ready to be serviced monthly. Servicing includes the receipt
and posting of mortgage payments, assessment of late charges, updating
of house indices, calculating new mortgage balances and printing
of monthly statements to mortgagors. Since the new invention has
both multipart obligations and an equity interest based on house
prices, the system produces amounts which are unique to these monthly
statements and uniquely calculated by this new mortgage system.
These statements not only reflect outstanding and unpaid mortgage
balances, but the value of the homeowner's equity share based on
latest house price indices. In effect, therefore, the system calculates
a proforma settlement on the assumptions that termination occurs
at the time of each statement and the actual proceeds on sale equal
the amount calculated by the latest house price index.
The servicing process, as described above, is repeated until termination.
This occurs under the following circumstances: sale of house or
homeownerinitiated refinancing, foreclosure, or the end of the
stated term of the instrument. Table 1 contains the "Termination
Input Variables" to this process. The system, first of all,
determines the initial balance of Section A and B obligations as
owed by the homeowner at time of settlement. For Section A and B
this is the outstanding balances from the mortgage file, but for
Section B, additionally includes the calculation of the JVP share.
At this point, the actual amount of proceeds on sale are compared
to these balances. Any excess of proceeds is distributed to the
homeowner. Any deficit, as in foreclosure, reduces the Section A
and B obligated balances in proportion to those balances. In addition,
there is a cap calculation on the Section B JVP share to insure
that early termination of the instrument does not lead to an excessive
return to Section B. The calculation only applies during the first
few years of the mortgage and uses a percentage return cap as a
test against the actual investment return to Section B at this point.
As mentioned above, the proforma settlement calculations in the
origination and servicing processes are essentially the same as
actual settlement at termination. The only difference is the use
of actual vs. proforma input data.
The following is a detailed description of a system in accordance
with the present invention. Reference hereafter is made to FIGS.
1 through 3 as flowchart descriptions of the system; Table 1 as
a list of variable abbreviations, definitions and calculations;
and Tables 2 through 3A as sample output created by one embodiment
of the system.
In the Issuance process as described at 11 in FIG. 2A data source
1 (Issuer) applies the data as per Table 1 (Issuer Input Variables)
through a computer interface unit 2 and to its memory 3. Input variables
include: the stated term of the entire mortgage instrument in years
(a), the length of Section A in years (b), the minimum allowable
down payment as a percent of house price (d), the annual stated
interest rate on which Section A monthly payments are calculated
(e), any annual premium or discount over e to calculate Section
B payments (i), the Section B JVP equity share (g) and percent age
of financing (c), a percentage allowance off the indexed house value
at Termination before applying the JVP share (j), an average monthly
percentage maximum return on investment limit (i), the months from
inception within which the limit applies (h), and an optional Fee
(k), if any, which can be assessed in the financing. Note that the
values selected for the above variables are not limited by the nature
of the calculations embodied in the invention, but rather by business
practice and market conditions as defined by authorized issuers.
Once the Issuer has completed input of parameters for new mortgage
issuances at 11, the data processor at 4 and mortgage system at
12 in FIG. 2 transforms the Issuer Input Variables into Issuer Output
Variables. These can also be displayed at 8 and printed at 7. First,
the length in years of the Section B mortgagee part (p) is calculated
as the difference between the total and Section A term as input
above. Note that the Section B term of monthly mortgage payments,
as calculated below, begins after the close of the Section A payment
period, which, in turn, begins at mortgage inception. Next, the
system converts the total, Section A and Section B lengths of term
and annual interest rates to a monthly basis with simple division
by 12. Finally, the annual effective interest rates for both Section
A and B are calculated by compounding the monthly rate for twelve
months.
Tables 1 through 3A show an example of an instrument with twenty
year ( fifteen for Section A and five for Section B) life, 10% annual
interest rates, a 50% Section B JVP equity share for 25% financing,
a 6% selling allowance, a cap period of 36 months and monthly cap
or ROI limit of 1.24%. The results of these calculations and the
computer system is transferred via a diskette media in one embodiment
at 6 and 13 to the origination process at 21 for input by authorized
mortgage originators.
In the origination process as described at 21 in FIG. 2B, data
source 1 (originator) applies the data as per Table 1 (Issuer Input
Variables) and computer system through a computer interface unit
2 and to its memory 3. The following data from prospective homeowners
or mortgagors are then input by originator via 5 at 22: house purchase
price (aa), actual down payment percent provided by homeowner (ab),
and the current house price index in the locality of the house (ac).
Once the originator has completed the input on potential mortgage
originations at 21, the data processor at 4 and mortgage system
at 23 and 24 in FIG. 2B transforms the combination of Issuer and
Inception Input Variables into Inception Output Variables. These
can also be displayed at 5 and printed at 7. If the terms are accepted,
the computer system also prints the mortgage instrument at 30.
The total financing at 23 is calculated by first assessing an optional
fee (ar), if any, using a percentage times the total mortgagee financing
as follows. Homeowner financing (au) is calculated as the higher
of the minimum required percent or the percentage made available
by the homeowner. The Section B financing share (at) is calculated
as a percent of the total purchase price (aa). Section A financing
(aq) is the residual of the total purchase price, plus the mortgage
fee, less homeowner and Section B financing.
At 24 the system calculates the monthly payments made by the homeowner
under Section A (which commence one month after inception through
the close of the Section A term), and Section B (which are paid
commencing one month after Section A termination through close of
the stated instrument term). These payments are the result of a
function, PMT as defined at the end of Table 1. This function determines
the monthly payments for Section A (av) and Section B (aw) required
to amortize their respective initial debt obligations of as and
at, using respective interest rates of t and w, to zero balances
at the end of their respective payment periods of r and s.
At this time, prospective homeowners would also want Termination
Input Variables entered at 25 on a proforma basis to assess the
results of termination or settlement of obligations under several
different termination conditions. These conditions include the proforma
month of termination (bb), proforma house price index at such time
(ba) and the proforma proceeds from sale (bc). The computer system
at 26 then calculates settlement as further described in FIG. 3
and as follows.
Origination Input Variables as already input at 61 are combined
with the Input Termination Variables at 62. At 63 the Net Value
(bv) is calculated by first determining the Gross Value (bu). This
is the ratio (bt) of house price index at proforma termination
over that at inception times house purchase price. The Gross Value
is then reduced by the Selling Allowance. The Net House Value is
then used at 64 as the basis for equity sharing as between homeowner
and Section B.
At 64 the value for equity sharing between Section B and the homeowner
is first determined by calculating the remaining Section A and B
debt principal obligations (br and bq respectively) by subtracting
the amortized reduction of these balances (bp and bq) from the original
amounts. The Net Equity for Sharing (bw) is the Net House Value
as above less the remaining principal obligations. The preliminary
Section B JVP and homeowner equity is preliminarily calculated as
bx and bz, using their respective equity percents. At 65 the Section
A and B obligations are then calculated. At 66 for Section A this
is the principal balance at proforma termination as calculated
above. For Section B it is the sum (by) of the Section B principal
obligation and Section B's JVP share.
The actual distribution of proceeds on sale are subject to two
tests at 67 and 69. The first test is whether the proforma proceeds
upon sale (bc) exceed the obligations owing to Section A and B as
calculated above. If they do, complete distribution of obligated
amounts is available to Section A and B as per cf and cg. If not
(as in the case of loss on foreclosure), the proceeds and loss are
shared on a prorata basis between Section A and B in proportion
(ca and cb) to their obligated balances at 68A and 68B. The Section
B obligated balance is then subject to an additional test at 69
to insure that early termination does not provide an excessive return
to the Section B mortgagee. If the proforma termination is within
the cap period and the amount of cg exceeds the cap percent over
the proforma term of the loan, ch is the result of any such excess.
This is reduced from cg to produce the final Section B amount for
distribution (ci) at 70.
A final step of proforma settlement at 27 in FIG. 2 is the calculation
of the future value of homeowner Net Equity Value (cu) at termination.
This is the sum of homeowner distribution of remaining proceeds
after paying Section A and B (bzz and ch) and the future value of
homeowner savings in monthly payments versus a conventional loan
(cs). The latter is determined by assuming the homeowner would have
a conventional monthly loan payment of cp under assumptions of borrowing
the entire mortgage principal (i.e., Section A and B amounts) at
the Section A interest rate. It also includes the effect of compounding
the homeowner's monthly savings under the assumption that he or
she invests it at the Section A interest rate.
Also showed as part of the origination process at 28, but not shared
with prospective homeowners, is a calculation of the Section A and
B return on initial investments or financing (cn and co respectively).
This is the percent which discounts the future value of Section
A and B distributed amounts at termination to their respective financing
amounts at inception using the RATE function as defined at the end
of Table 1.
If the homeowner accepts the terms of the mortgage at 29, the mortgage
is printed at 7 and 30 and stored in the file of outstanding mortgages
at 31 for servicing.
Table 2 shows a calculation of settlement using the sample variables
per Table 1. Block 53 FIG. 2D is a summary of the settlement calculation
process. As noted, 51 is the proforma input of Termination Input
Variables as part of the proforma settlement process. 52 is the
input of the actual mortgage balances from the file of outstanding
mortgages, using actual Termination Input Variables to determine
actual settlement. As such, the Table 1 sample data and Table 2
sample output as produced per 54 can be viewed as both a calculation
of actual and proforma settlement.
After origination and before actual settlement of mortgage obligations,
mortgages are serviced as per FIG. 2C by inputting such balances
at 45 from storage media 6 into data processor 4. These balances
are the respective outstanding Section A and B debt obligations
(br1 and bs1) from prior periods, which are updated from 1 into
interface unit 2 and memory 3 each month by homeowner payments (eu)
at 44. Note that the homeowner payments reflect the actual Section
A or Section B amount owing at the time of payment. This is the
sum of any escrow payments to be withheld (db) at 43 and any late
charges (dc) at 46 added to either the Section A or Section B outstanding
debt obligations owing. The latter is tested in eu based on the
time of payment (bb).
Until termination is initiated at 50, a monthly mortgage statement
is calculated at 47 and 48 and produced by the system at 49 via
printer 7. The monthly mortgage statement employs the same settlement
calculations of FIG. 3. As such, the system calculates another proforma
settlement as of the date of the statement with the following modifications.
First of all, the statement as shown in Table 3 reflects two sets
of settlement balances, those calculated as of the beginning of
the current statement period and those calculated as of the end
of the current statement period. These are differentiated by reference
to the Statement Output Variables of Table 1. Variable abbreviations
suffixed with the number "1" represent the same results
and calculations as the corresponding Settlement Output Variables.
However, the latter represent the amounts as of the beginning of
the current month (or end of prior month), while the latter are
the amounts at the end of the period.
Note also that house price indices ba are input periodically, but
not necessarily monthly, at 42. Since the Bureau of Census House
Price Indices are only available on a quarterly basis, the system
uses currently available indices in calculating monthly increases
in those indices above. In addition, since there is no sale or actual
proceeds from sale (bc), this is equated to bv for the purposes
of calculating Section A, Section B and homeowner balances.
Wherever within this specification and appended claims specific
terms such as length of time, interest percentages, points paid,
percentages or amounts of division between Section A and Section
B (mortgagees), amount of mortgagor down payment or percentage equity
share division between mortgagor and Section B mortgagee, or references
to total length of both parts of first mortgage, such references
shall be understood to be examples only and not generic to, nor
limits upon, the process of and method for which patent coverage
is here being sought.
While particular embodiments of the present invention have been
shown and described, it is apparent, especially from the preceding
paragraph, that changes and modifications may be made without departing
from this invention in its broader aspects, and, therefore, the
aim in the appended claims is to cover all such changes and modifications
as fall within the true spirit and scope of the invention:
Moreover, while this specification and appended claims also references
the application of the invention to purchase of homeowner dwellings,
the intended application of the invention is not limited thereto,
but additionally applies to the acquisition of all forms of real
property through multipart mortgage instruments with equity sharing
as herein described.
