Financial Poise

A Few Minutes with…Jorge Newbery, CEO of American Homeowner Preservation

Jorge NewberyAmerican Homeowner Preservation is a platform that not only provides a means for accredited investors to earn a respectable return on their money through investing in local real estate, but also provides homeowners sustainable solutions to be able to keep their homes. AIMkts recently sat down with Founder and CEO Jorge Newbery to find out how it works.

1. Let’s start with the basics.  What does AHP invest in?

We invest in distressed mortgages, which are typically nonperforming mortgages offered at big discounts by banks and other lenders. Borrowers are frequently months or even years delinquent, and oftentimes the mortgage is “underwater,” meaning that the home securing the mortgage is worth less than the amount due on the loan.

2. How does AHP fit in?  How does AHP offer  “high yield distressed mortgage investments”?

To give you an example, AHP purchased a first mortgage secured by a home in Maywood, a Chicago neighborhood. The mortgage balance was $195,418 and the current value of the home was $32,000 (this extraordinary drop in value is not uncommon in many low and moderate income neighborhoods in which prices spiraled upward when fueled by cheap and easy subprime mortgages, and then downward once the spigot was turned off).

AHP bought the loan for $9,600, 30% of the current value of the home. The borrower had not paid in more than two years and owed $43,471 just to bring the loan current. AHP contacted the homeowner, whose layoff from a 17-year job had prompted the delinquency. We agreed to settle the $43,471 arrearage for $2,000, giving him a true fresh start. We also dropped his monthly payment from $1,449 to $320. Finally, we discounted the principal balance from $195,418 to $29,600.

The homeowner was extremely grateful as a result of this financial transformation, so AHP fulfilled our social mission. However, let’s look at this from a financial return perspective: in the first year, AHP will receive $2,000 plus eleven $320 payments, for a total of $5,520, a 50%+ first-year return on the $9,600 investment, with many years of payments still to be received. Thus, we also fulfilled our financial mission and are able to pay 9 – 12% returns to our investors.

It is the putting together of these elements together creates a “high yield distressed mortgage investment.”

3. What was inspiration for American Home Preservation?

We started in 2008. A friend of mine, Emily, was a loan officer in California. In mid-2007, her income dried up and she suddenly could no longer afford the home she shared with her three children. At the time, home values had stared to drop, and her bank offered to accept a short sale at a discount to what she owed.

Emily called me and asked if I knew anyone who would buy her home and then lease back to her so she could continue to raise her children, and also have the opportunity to repurchase her home once she stabilized her finances. The vision became to create an organization which could be the friend to all of these struggling homeowners by buying their homes at short sales, and then providing them affordable lease payments which were less than their mortgage payment, and option prices which were lower than their prior mortgage balances and more in line with today’s reduced home values.

In May 2008, AHP opened an office in Cincinnati and thousands of families applied for assistance.  However, we soon discovered that many banks were unwilling to approve short sale offers in which the borrowers were able to stay in the home after the sale. In some cases, we had banks issue approval letters which approved our purchase price but required that the families vacate the homes and not return.

It seemed illogical and punitive, and we often tracked the alternate outcomes: banks would refuse our offers, only to then then spend thousands of dollars to foreclose on these families, kick them out of their homes, and cause the homes to lose more value.

4. Why would the homes lose more value?

Vacant homes were often vandalized. A house worth $50,000 with the family in the home might eventually only worth $25,000 as a vacant stripped shell. Yet, the banks were refusing solutions which would net them much greater recoveries.

5. In 2011, AHP described itself as a “socially responsible hedge fund” – What does that phrase mean? Where does that fit into how AHP operates now?

One typical hedge fund component AHP did not employ is leverage, which can increase rewards but also increases risk.  That has not changed.

Our strategy of expeditious borrower-friendly solutions achieves a social good, resulting in the “socially responsible” label.  A typical hedge fund will focus on financial returns regardless of the social impact, good or bad, whereas AHP is intent in achieving both financial and social returns.

Today, AHPis online.  This is more efficient and transparent.  Improvements include a reduction in minimum investment to $10,000 (the minimum was $250,000 in the hedge fund), expected returns predetermined at 9–12% depending on the duration of the investment, and monthly payouts to investors.

6. How does AHP select the homes that are ultimately purchased?

Homeowners can’t “apply” to AHP, but we are building a registry where homeowners can input their loan info. Then, we will filter any pools which are offered in order to find matches which can accelerate acquisition and disposition in the event registered homeowners’ loans are offered for sale.

However, we buy what banks and other lenders determine they want to sell. We cannot call a bank and ask to buy a certain loan. Instead, banks will offer 100 loans or 1,000 loans, or whatever, and ask us to bid to buy a pool of loans. We then conduct our due diligence and use our findings in negotiating final pricing with the sellers.

7. Is there anything homeowners can do to try to have their homes purchased by AHP? Can investors make suggestions or recommendations?

Investors can recommend the registry to any families who need assistance.

8. How does AHP make the loans available to investors?

Once we finalize a pool, we then offer the investment opportunity to our investors through our crowdfunding website, www.ahpinvest.com.  We try to be as transparent as possible by sharing our due diligence reports and other data on our site, so that investors can browse and get acquainted with what they are considering. Thus, investors can decide which AHP opportunity to invest in, but they do not have any direct input in which mortgages we purchase.

9. After purchase, what is an investor’s responsibility/involvement?

AHP is a passive investment. Thus, after investment, AHP deposits returns directly into investors’ bank accounts on the tenth of every month. Investors can monitor the financial and social performance of their investment on our site and will receive quarterly account statements from our fund administrator.

10. Does AHP limit its investments to certain areas?

No. AHP invests in distressed mortgages nationwide.

11. What has the response been from investors who participate in AHP and get to feel like they’ve helped someone, at the end of the day, in addition to making money?

Several investors have cited our social mission as the main draw to investing with AHP.

Many investors have friends or relatives who have experienced the pain of foreclosure, and to be able to ease that hurt for other families is rewarding.

Every month, investors receive a statement which shows not only the financial return which was deposited into their bank account, but also the social return of their investment: how many families retained their homes, their annual payment savings, the amount of negative equity extinguished, and the number of vacant homes put back in service.  We also include a story or two about a family which was assisted in the prior month. These are families who had predicaments which were solved by AHP solutions funded by AHP investors.

12. What kind of responsibility/accountability falls to the homeowner?

Homeowners need to communicate, be realistic with their circumstances and hold up their end of the deal, which is usually to make payments on time.

When we first buy a loan, we give homeowners three options: settle the loan for a discounted lump-sum, modify the loan with reduced payments and discounted principal, or receive a cash incentive to cooperate with a deed in lieu of foreclosure or a short sale.  We give the families the actual numbers at the outset and they can decide what is best for them. The numbers are derived from simple formulas based on the value of the house. Just as AHP is transparent with investors, we are transparent with homeowners.

13. Why should an accredited investor sit up and pay attention?

Our annual returns should attract any investor’s attention. Further, AHP provides diversification.  For instance, if the stock market sinks there should be no impact on AHP’s returns.

Most importantly, AHP is a tool for investors to have a real direct positive impact on America’s struggling families. Foreclosures shatter families. This housing crisis has displaced more families than any natural disaster or war in American history.

AHP is a tool which empowers any accredited investor to use a computer and bank account to play a part in getting these families back on their feet. This is neither a handout nor a charity and we have no government backing – AHP is a market solution to a social problem

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