Government Residential Ownership Program (GROP

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By Christopher Nolan December 20th, 2008

The Federal Housing Authority (FHA) takes ownership of residential property that is ‘underwater’ and the owner decides to enter the Government Residential Ownership Program (GROP). The (FHA) gives the lender fifty cents on the dollar. The (FHA) sells the property back to the homeowner at the predetermined (GROP) home value,* reflecting the true value. If the homeowner cannot afford the 10% down payment, or if they do not qualify for a mortgage, the property will revert back to the (FHA). The property will be used for the GROP rental/buy-back program or put to auction. If the homeowner decides to purchase the property, they can get a private loan or get a loan from the (FHA) loan division, Federal Home Loan Agency (FHLA). The (FHLA) issues 30-year fixed mortgages; the interest rate falls into one of four tiers based on credit score. The Federal Reserve and FHA joint committee determines the four interest rates used in (FHLA) loans. If the homeowner does not purchase the home, they can enter the (GROP) rental/buyback program. Rent is set at 7.2% of (GROP) home value* per year, paid monthly. The renter is required to put 16.67% into an escrow account to be used for the down payment in five years. After five years, the renter will take a 30 year loan from the (FHLA) with the mortgage payment remaining the same. If the renter decides not to purchase the home in five years, the home will go to auction and the escrow account will be added to the renter’s future social security payment.
Example: $200,000 home Rental payment-$1,200 ($200,000 x .072/12) $1,000 goes to rent and $200 into escrow ($1,200 x .1667) Down payment-$12,000 ($200 a month for 5 years)

If the property is not the primary residence, the renter has the first right of refusal for ownership of the property. The renter qualifies for the same loan as the primary residence owners. If the renter does not purchase the property, the owner can purchase the home and may qualify for the Investment Property FHLA loan. If the property is neither sold to the owner nor rented, it goes to auction. It can be purchased as a residential or rental property. If purchased as a rental property, the investor must hire some with or have a Qualified Property Manager (QPM) license.** The cost of the QPM will be including in the escrow account of the loan, along with property taxes and homeowners insurance. The (GROP) rental/buy-back and non-auctioned property will be held in trust by the (FHA) for the State. Some non-auctioned property will be added to the Urban

Redevelopment Program (URP). The (FHA) is the holder of real estate property, and the (FHLA) is the holder of mortgage loans. If the (GROP) property has a mortgage that is currently packaged in a security, it will be removed from the pool. The mortgage pools will be broken down into foreclosed homes and non-foreclosed homes. The foreclosed homes will go through the same (GROP) process as previously mentioned. The non-foreclosed mortgages will be separated, evaluated, and reclassified based on credit quality and duration. The mortgages will be pooled together to create a new Packaged Mortgage Security (PMS). The (PMS) will then be sold as securities at auction and traded on the secondary market. Each (PMS) has a manager overseeing it. This (PMS) manager will communicate with the (QMP) and the transfer agent. The (FHLA) will write mortgage loans, creates the (PMS), and help facilitate the process of securitizing loans to become exchangeable. All current securitized loans will go through the same process of separating, evaluating, and reclassifying. The loan is then put into a (PMS), assigned a PMS Manager, auctioned, and then traded on the exchange. Ginnie Mae will be dissolved and taken over by the (FHLA). The Money Center Bank (MCB) will go through the same process for bank securitized loans. The (FHLA) will buy some Bank Packaged Mortgage Security (BPMS) from the (MCB) to create liquidity. The price paid for the (BPMS) will be a discount of the sum of the underlying properties (GROP) home value* inside the pool. The (FHLA) will hold the (BPMS) pools on their balance sheet or sell them on the exchange. The Federal Reserve and (FHA) joint committee will determines how many (PMS) and (BPMS) pools to buy and sell as a means to control real estate mortgage supply and demand. The Federal Reserve will lend capital to Money Center Banks (MCB) through overnight, short-term, long-term federal funds and non-voting preferred stock. The banks will also raise equity in the form of stock and preferred stock through an IPO. The Federal Reserve will hold and trade these new corporate notes as a means to control monetary policy. With this new capital the banks purchase assets in the form of loans. These assets include direct mortgages from a non-(MCB), securitized loans, and new loans. A (MCB) is the only institution allowed to purchase loans from other financial institutions and package them into (BPMS). The Securitized Loan Authority (SLA) is the regulator body overseeing all packaged loans; including those from the (FHLA), (FALA) and (MCB). They also oversee all packaged real estate, including REIT’s. Oversight of the (SLA) consists of group efforts between the (FHA), SEC, FDIC, and Federal Reserve. The auto loans will go through a similar process and may be purchased by the Federal Auto Loan Agency (FALA). These loans will be regulated by the Federal Auto Authority (FAA), which is a similar entity to the (FHA). The car czar will oversee the (FAA).

The auto financial companies (such as GMAC and Ford Motor Credit) will combine and become the new AutoBank (MCB). The mortgage loans issued by these companies will undergo the same process of separating, evaluating, and reclassifying. The loan is then put into a (BPMS), assigned a BPMS Manager, auctioned, and then traded on the exchange. The industrial financial companies (such as GE Financial, Tyco Financial, and CIT) will combine and become the new IndustrialBank (MCB). I envision the Money Center Banks (MCB) to include: Morgan, Wells Fargo, Bank of America, CitiBank, Bank of New York, IndustrialBank, and AutoBank.

Programs: Agencies:

Government Residential Ownership Program (GROP) Urban Redevelopment Program (URP) Federal Housing Authority (FHA) Securitized Loan Authority (SLA) Federal Home Loan Agency (FHLA) Packaged Mortgage Security (PMS) Federal Auto Authority (FAA) Federal Auto Loan Agency (FALA) Money Center Bank (MCB) Bank Packaged Mortgage Security (BPMS)

*The value of the home for GROP purposes is derived from multiplying the 2007 property tax value of the home by that particular city’s residential property multiplier. The city multiplier is the decrease percentage from the 2007 median property tax value and the new GROP median home price for that city. The new median home price is calculated based what the mortgage loan would be if the borrower where to pay a mortgage payment that equates to 28% of family income. It assumes a 6% interest rate and repaying the loan in 30 year.
Example: City annual median household income-$51,429 City 2007 median home price -$285,000 Monthly Mortgage Payment-$1,200 (51,428.57/12=4,285.71; 4,285.71x.28=1,200) City new GROP median home price-$220,165 (N=360, I=6%, PMT=1200) + 10% City residential property multiplier-.2275 (285,000-220,165/285,000) Home value according to 2007 property tax=$560,000 Value of home for GROP purpose=$432,600 (1-.2275 x 560,000)

**Qualified Property Manager (QPM) collects rent and makes sure the property is maintained. The QMP can be an employee of the (FHA), an individual investor or an institutional investor. They must pass a certification test and maintain a license. *** (PMS) manager-Each PMS is an assigned individual caretaker. They are employed by the (FHA).

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