The Gameplan to Solving the Housing Crisis
The Gameplan to Solving the Housing Crisis
A triple-win scenario for tenants, owners, and institutions
In our last substack, we defined “money” and homeownership: unlimited rights, predictable costs, and access to equity. T-Homes will be able to reduce costs to homeowners while preserving all of the current benefits.
Today we are going to introduce two case studies that this ecosystem will use to prove that we can solve the real estate crisis for both sides of the transactions: renters and property owners.
Case Study #1: Solve for Affordable Housing / Rental Crisis
The housing situation in America today is your typical story of the rich getting richer and the poor getting poorer. Tenants suffer by paying a higher percentage of their income for housing, while the landlords continue to reap benefits as rental income increases create for greater profit margins against their fixed loan payment on a given property.
Why are housing prices so high? Because inflation has outpaced average income by a significant margin. According to realestatewitch.com,
“Accounting for inflation, house prices have soared by 118% since 1965, despite the fact that income has only increased by 15%.”
There are currently only two solutions that address this problem:
Increasing rents
Government subsidies
Unfortunately, both of these “solutions” have a persistent squeeze on the middle and lower class. And with over 80,000 apartment communities in the US currently operating with government assistance, a new, sustainable, scalable, and affordable housing solution is desperately needed.
Which is exactly what REAT is working to create, without damaging the middle class by heavy rental increases or by increasing taxes to the average American.
REAT is undertaking this case study by purchasing one property, an apartment building, as a test. Within this property, we will sell one unit in the building while continuing to rent out the remaining units. Over the course of several months, REAT will be able to study its model’s impact.
This first step will begin the REAT flywheel. As you may recall, REAT will implement “self-imposed rent controls” where rent will never increase more than inflation in a given year and will typically fall wellbelow, around 1% per year.
No profitable solution currently exists without government subsidies or large rent increases; however, we intend to demonstrate the ability to solve the rental crisis.
Case Study #2: Solve for Housing Inventory Crisis While Providing Safer Debt for Institutions
Not only is there a rent crisis, there is also a housing inventory crisis. Housing inventory in the U.S. has decreased by a whopping 73% over the last 10 years, which has created a damaging feedback loop to the middle class.
Instead of current solutions, such as building new inventory or using a form of pop-up box housing, T-Homes will address the inventory crisis by introducing additional inventory to the market. We will implement this process while lowering the barrier to entry to homeowners and also by providing a higher quality form of debt to banks and institutional partners.
How Will T-Homes Solve the Inventory Crisis?
As mentioned above, we will be purchasing one apartment building and selling one of its units in order to observe how these two pieces perform.
Instead of creating new buildings, T-Homes will purchase existing multi-family buildings and sell the units to the tenants, in turn, creating homeowners out of renters.
There is strong market demand for people who want to buy their apartment and realize the advantages of homeownership. As stated in previous posts, this model will allow us to sell property to owners with under 2% in total sales fees, making it significantly more affordable than traditional financing.
Here, T-Homes is re-imagining the current landscape for home ownership opportunities by lowering its barrier of entry, all without sacrificing safety of debt or profit for institutional partners.
Housing Issues Affecting Banks and Financial Institutions
Although our focus is on providing equitable housing for the middle class, we must address the foundation of the industry first: major banks and financial institutions. The US housing market is just under $10 trillion, with the majority being held by banks and institutions with MBS (mortgage-backed securities) on their balance sheets.
Two of the risks associated with these holdings are prepayments and foreclosures; however, with our SRH product we will be able to ease these two pain points for banks and institutions.
Overview of Prepayment Issues
While you may think that paying your mortgage in advance would be viewed favorably by a bank, you first need to consider how the bank sees it.
Lenders and investors make much of their money from interest over the life of the loan. When you pay off your loan sooner than expected, the institution doesn’t earn as much interest as they anticipated. This explains why many lenders charge prepayment penalties in the early years of a loan: to discourage borrowers from paying off their debts early and to make up for lost interest that they would have otherwise received in the future.
Mortgages are amortized, which means that your monthly payment stays the same but the amount that gets applied to interest is highest at the beginning of the loan and declines as time goes on.
For example, let’s say you take out a $300,000 mortgage loan with a thirty-year term at 4% interest. Over the course of thirty years, you will have to pay $215,608 in interest. In the first 3 years of the loan, you will have paid $35,057 in interest alone. That equates to almost 17% of the total interest over the life of the loan. Multiply that lost interest by the hundreds or thousands of MBS held by institutions, and you will understand how prepayments can have a significant adverse effect on financial institutions.
Overview of Foreclosure Issues
Foreclosures are even worse for financial institutions than prepayments. Why? Because when a property goes into foreclosure, not only does the institution stop receiving payments, but they also become burdened with the legal expenses and other costs associated with taking ownership of the house, and subsequently trying to sell it. Unfortunately, many foreclosed properties are sold for less than what is owed on the loan, resulting in a loss to the bank’s bottom line.
As if losing money on these loans wasn’t bad enough, federal regulators can punish banks for taking on too much credit risk by assessing fines and other penalties. Not only does this hurt their own pocketbooks, but their reputations as well. Other corrective actions can include higher capital reserve requirements, increased oversight, and more frequent compliance reviews.
T-Homes for Institutions
The T-Homes model will be a welcome improvement to the status quo for banks and financial institutions (as well as homeowners). T-Homes will be under a separate, securitized entity.
First, we must clarify that the T-Homes mortgage debt is structured in US dollars, not cryptocurrencies or stable coins. Banks and institutions can continue holding these debts on their balance sheets without the need to exchange currencies or stable coins.
With this new model of optimized debt, institutions will benefit from:
Reduced foreclosures and prepayment risk
Increased profitability (yield)
Safer mortgage debt, which assures safety and security
How Will This Happen?
The utility of a T-Home is more cost-efficient to all parties, including a lower net housing payment and transaction fees for the owner. This in turn lowers the owner’s overall housing costs (debt-to-income), which means their ability to repay will be stronger than if they were to obtain a traditional mortgage.
Therefore, since the owner is in a stronger financial situation, any MBS debts that contain T-Homes will result in lower foreclosures to the institutions.
Also, when owners of T-Homes decide to sell, the new buyers will utilize a T-Home of their own, thus, increasing the number of SRHs in aggregate, which will reduce prepayment issues for institutions over time.
The Best Part of All
Perhaps the most exciting benefit to banks and institutions will be the increased profitability and safer yield.
The SRH product will not be classified as a traditional MBS product, however, the mechanisms in place will be identical and optimized in areas where traditional MBS products lack, in order to optimize for safety and higher returns compared to other non-agency MBS debt.
When institutions buy non-agency MBS debt in the future, it may include a distribution of T-Homes. While current non-agency pass-throughs are often formed with prime or subprime nonconforming mortgages, institutions can rest assured that all T-Homes debt has been underwritten with FHA-quality guidelines and allows for a more favorable debt-to-income ratio for owners.
Therefore, T-Homes debts will be more profitable and safer for banks and institutions than their previously-held non-agency private labels.
TL;DR
The ecoystsem above will be able to provide:
Scalable affordable housing
More efficient housing inventory
Safer and more profitable debt for banks and institutions
