AU2015100259A4 - Appointed equity financing scheme - Google Patents

Abstract

In accordance with the present invention there is provided an apportioned equity financing system, including: a funding component for receiving asset value data representing the value of an asset, and determining lender value data representing a percentage of the asset value to be held by a lender, before being on-sold to investors, and borrower value data representing a percentage of the asset value to be held by the borrower; an option deposit component for generating option deposit data representing an option value to be paid by said borrower to said lender and for processing payment of said option deposit value to said lender; a valuation component for monitoring a valuation time period, and at the expiry time of said period, for determining whether the said asset value has appreciated above a predetermined rate, and for processing return of the option deposit value to the borrower if said predetermined rate is met. Preferably, the option deposit data is determined on the basis of the said asset value data, said valuation time period, the predetermined rate, the lender value data, and the valuation date associated with said asset. Preferably, the option deposit data is generated using an options pricing or derivatives pricing process. The present invention also provides a loan process, including: determining an option deposit value to be paid by a borrower to a lender using and options or derivatives pricing model; and determining, after a valuation time period, whether the option deposit value remains with the borrower if the value of an asset, secured by the lender, has appreciated above a predetermined rate. The present invention also provides a system whereby third-party investors can buy and sell and trade shares of equity in the properties which would be transferred into a pool; that is markets could be made including: a standardized system for processing said equity shares based on property valuation strata and geography and; pools based on capital growth or rental income from said properties and/or a combination of the two. The present invention also allows for owners or mortgagors to sell equity in their properties that is, it is applicable not just at the point of origination: Including a standardized valuation and timing process The present invention also allows for owners or mortgagors to buy back or buy the equity in their properties that they do not currently own: Including a pooling arrangement and standardized valuation process. APPORTIONED EQUITY FINANCING SCHEME: Figure 3 Apportioned equity Inan dotrminatinn Loan funding 306 process Equity portion held by borrower; conventional principle and interest loan Equity portion held by lender Determination and acquisition of OPD 326 324 312 Investment Pool at T Failed; Passed; Appreciation Hurdle reached hurdle not reached 322 Equity pieces from already 316 owned properties Lender retains OPD OPD returned to borrower -

Description

Editorial Note 2015100259 There are 9 pages of description DETAILED DESCRIPTION An apportioned equity financing system 100, as shown in Figure 1, is implemented using a computer system 102. The computer system 102 is based on a standard computer, such as a 32 or 64 bit Intel architecture computer produced by Lenovo Corporation, IBM Corporation, or Apple Inc. The processes executed by the computer system 102 are defined and controlled by computer program instruction code and data of software components or modules 150 stored on non-volatile (e.g. hard disk) storage 104 of the computer 102. The processes performed by the modules 150 can, alternatively, be performed by firmware stored in read only memory (ROM) or at least in part by dedicated hardware circuits of the computer 102, such as application specific integrated circuits (ASICs) and/or field programmable gate arrays (FPGAs). The computer 102 includes random access memory (RAM) 106, at least one microprocessor 108, and external interfaces 110, 112, 114 that are all connected by a system bus 116. The external interfaces include universal serial bus (USB) interfaces 110, a network interface connector (NIC) 112, and a display adapter 114. The USB interfaces 110 are connected to input/output devices, such as a keyboard and mouse 118. The display adapter 114 is connected to a display device, such as an LCD display screen 122. The NIC 112 enables the computer system 100 to connect to a communications network 120, such as the Internet. The computer 102 includes an operating system (OS) 124, such as Linux Enterprise Server or Microsoft Windows Server (if the system 100 is operating as a server), or Windows XP or Vista if it is operating as a personal computer. The computer 102 also includes web server code 126, such as Apache, and a database management system (DBMS) 130, such as MySQL, to provide structured query language support and to enable maintenance of and access to data stored in SQL database 132 of the system 100. The web server 126, DBMS 130 and the modules 150 all run on the OS 124. The modules 150 may include markup language code (such as HTML, XML, XHTML), scripts (such as PHP, ASP and CGI), image files, style sheets and program code written using languages such as C, Ruby or PHP. For the scripts, the modules would include a runtime engine for compilation in real time. The modules 150 may also be implemented using a framework, such as Microsoft.Net or Ruby On Rails. The modules 150 can then include computer program classes, methods and files as part of the framework using computer program instruction code such as Ruby or Java. The computer 102 is able to generate and provide code elements for user interfaces that are served by the web server 126 and requested by a remote web browser on a client computer 160 that is connected to the computer 102 over the network 120.

The modules 150 including a funding determination component 202, an Option Payment Deposit (OPD) generation component 204 and a valuation component 206, as shown on in Figure 2. The modules 150 control performance of an apportioned equity financing process 300, as shown in Figure 3. The fund determination component 202 controls the collection and determination of data for parameters as part of a loan origination process. If a borrower is unable or unwilling to secure all loan funds, such as for purchase of a property, in circumstances where the borrower is able to retain full equity and ownership of the asset, then a lender and borrower can agree to share equity in an asset, and hold respective portions of equity in an asset. The lender holding a portion of the equity temporarily prior to selling it to investors. Also a owner or mortgagor may wish to sell equity in their property. At step 302, and step 322, the values for parameters associated with an apportioned equity loan or sold equity arrangements are determined and agreed. As part of the apportioned equity financing system 100, the parameters include data representing: (i) The value of an asset (usually the purchase price of the asset) at the start of a loan (Asset_Value T(0)). (ii) The percentage of the equity in the asset (i.e. percentage of the asset value at any point in time) to be retained by the borrower. (iii) The percentage of equity in the asset to be held by the lender initially (e.g. the percentage of equity held by the borrower subtracted from 100). (iv) The percentage of target capital growth in the asset on a per annum basis. This data is hereinafter referred to as hurdle data representing a hurdle rate (hurdlerate). (v) Parameters associated with a valuation process to be executed during servicing of the loan, and identifying an independent provider or system that is to execute the process. Once the parameters are determined and agreed (step 302), a loan funding or funding process (304) is executed to forward the parameters required to commence separate loan origination processes for the equity portion held by the borrower (306) and the equity portion held by the lender before being sold to investors (308). For the equity portion held by the borrower, the loan origination process (306) that is executed is the same as a conventional loan. For the equity portion held by the lender, the loan or funding origination and loan servicing processes are combined using the parameters determined in step 302. The process 308 then proceeds to step 310 to invoke the Option Payment Deposit (OPD) generation component 204. This involves determination and acquisition of an Option Payment Deposit (OPD) value, and determination of a value date which defines a valuation period. The OPD value is determined using options or derivative pricing processes described below. The valuation period can be an agreed period, and for example, may be two years or more depending on the asset. Data representing the values of the OPD parameter and the valuation period are stored in the database with values for the other parameters, and a payment process is executed to obtain payment of the OPD value from the borrower at the commencement of the loan or funding. Once the OPD value has been paid by the borrower, the loan commences, and the financing system commences loan servicing by invoking the valuation component 206, which monitors the valuation period (312). Once the valuation period expires and the valuation date is reached the valuation component 206 initiates the valuation process and records a value of the asset determined by the valuation process as AssetValueT(i), i being an integer representing the number in a sequence of valuation dates 0,1,2,...n. The asset value data (Asset_Value T(i)) determined at the valuation date is accessed (312) to determine whether it is greater than or equal to the hurdle value. The hurdle value is determined by the system 100 as AssetValue T(i-1) x (hurdlerate+1). If it is not less than the hurdle value, a passed process 314 is executed whereby the value of the OPD is returned to the borrower 316. Operation then returns to step 308 so that a new OPD value can be determined based on the current asset value which will be paid and held for the next valuation period. The subsequent valuation period may be the same or different than the previous valuation period. If it is determined at step 312 that the current asset value AssetValueT(i) is less than the hurdle value, then a first failed process 318 is executed whereby the lender retains the OPD value 320 and then passes through that payment to the investment pool, and the operation proceeds back to step 308. In the case of owners selling shares of equity in their homes into the pool..... Owners will be able to sell shares in their properties into the pool. Owners may wish, for example, to do this to reflect a view on the value of their house or to free up cash for any purpose. Retirees will likely do so and take advantage of the invention, which has the advantage over schemes such as reverse mortgages where the debt compounds. Moreover sellers can buy back shares at the prevailing valuation at some future time, if they so wish. The pool will be structured based on levels of the initial valuation of the property and the geographic location. Examples, being Melbourne inner east properties between $1 million and $2 million dollars or Sydney lower North shore between $2 million and $3 million. Shares in the pool will have a common initial price say $5000 at inception irrespective of which strata of the pool they fall into. The price of shares will reflect the intersection of supply and demand but will also reference the valuation of the properties in the pool and whether the Valuation Tests have been met or otherwise and if the option payments have been appropriated. The pools will likely be a mix of equity from properties at loan origination and equity sold from pre-owned or funded properties. It is envisaged that the pool segment valuation for a specific price strata and geography will be a mix of the average of individual properties change in value in the pool and in the case of newly originated properties, whether the option payment has been returned or surrendered, that is whether the Valuation Test has been met. Importantly the person who buys shares has no ownership rights over individual properties. It is really a reference exposure to a group of underlying assets. If and when the property is sold the monies goes into the pool referencing the amount of equity sold and these shares are extinguished. Therefore the remaining shares increase in value. If the owner decides to buy back shares they have previously sold they will, referencing the initial valuation strata and geography, need to pay the prevailing price. The apportioned equity system 100 is particularly advantageous as it enables a borrower who is unable or unwilling to fully finance an asset, such as the purchase of a residential house worth $700,000, to be able to agree with a lender to obtain an interest in an agreed percentage of the house value, for example 25%. The borrower's 75 % portion is funded using a normal loan from the lender and can be secured by a mortgage over the borrower's equity. With regard to the lender's portion of equity, the system 100 requires data to be entered to define the valuation period and valuation process. For example, the property may be revalued every two years and a valuation obtained from a recognised property valuation service, such as Australian Property Monitors and/or RP Data Ltd. Data also needs to be provided to define the hurdle rate, which is a minimum required rate of return on the property. The hurdle rate is an agreed rate of return based on an analysis of a combination of the risk free rate of return plus historical pricing data for the asset, e.g. for a similar property in the neighbourhood. The determination of the OPD value is based on the asset value at the commencement of the valuation period, the time of the valuation period, and the hurdle rate and past valuation volatility parameters. The parameters are applied to option pricing processes which may be based on options pricing and derivatives models, such as the Black- Scholes model, the Monte Carlo option model and put-call parity models. The OPD is deposited with a lender at the beginning of the valuation period to mitigate the risk to the lender that the asset may not meet the minimum required hurdle return at the end of a valuation period. The OPD is surrendered to the lender and is passed through to investors in the pool should the value of the asset be assessed as not having appreciated by the agreed hurdle rate of return at the time of the agreed valuation date. Because the OPD is determined using option pricing processes, the amount of money involved is relatively modest. For example, if the borrower holds 80% of the value of a $700,000 house and assuming a 5% hurdle rate of return, the OPD may be about $1094 for one year, i.e. 0.15% of the value of the asset. At the end of each valuation period, if the valuation determines that the price of the asset has appreciated over the valuation period by more than the hurdle rate of return, the OPD is returned to the borrower or simply rolled over to the next period if the hurdle amount is exceeded. Alternatively, if the valuation determines that the price of the asset has failed to meet the hurdle rate of return, then the OPD is forfeited to the lender and passed through to the pool and the process repeated for the next valuation period. As mentioned, the equity held by the lender initially will be passed through to a pool for investors, this equity may be bought back by the borrower or alternatively the investors will share in any sale proceeds. If a mortgagor sells his/her property or buys back equity that equity will be extinguished from the pool. The monies received and the shareholding will be pro-rated across investors in that segment of the pool. New equity can be issued into the pool at the prevailing valuation. The OPD generation module 204 applies option pricing processes which assume that the asset value over time has characteristics that make it appropriate to apply an options pricing model. For example, to apply the Black-Scholes model requires property prices to: (i) Follow Geometric Brownian Motion (GBM). Property prices need to be log normally distributed which means that prices cannot go negative and the shape of the distribution of prices rises to a hump and then has a long tail. There is substantial research that shows property prices do indeed follow GBM, as discussed in, for example, Kau JB and Kennan DC, "An Overview of the Option-Theoretic Pricing of Mortgages" (1995) Journal of Housing Research 6. The changes in property prices can be negative or positive and are normally distributed. (ii) Exhibit constant volatility. Since the Central Limit Theorem (CLT) of probability assumes that in the long run, average volatility tends to one particular value and properties re traded infrequently, this is appropriate. To determine the value of the OPD parameter, the following parameters are first established: (i) A Spot Price (S). This is the value of the asset agreed at the start of every valuation period, i.e. Asset Value T(i). On loan origination it is the purchase price, and subsequently it is the asset value determined by the agreed valuation process. If the property is already owned and the owner wishes to sell equity in the property, it is the agreed valuation at the time of sale. (ii) A Strike Price (K). This parameter is the asset value data representing a target asset value at the end of the valuation period, i.e. the hurdle value = Asset Value T(i) x (hurdlerate+1). The value of the hurdle rate parameter can be tailored for every individual asset. (iii) Volatility. A number of parameters are used to represent the distribution of historical variability of prices of the asset, based on historical and localised data. House prices are log normally distributed while changes in house prices are normally distributed. Hence we have Geometric Brownian Motion, which is a lognormal diffusion process with variance growing proportional to the interval. GBM underlies the Black-Scholes option pricing model, which can be used in the calculation of the OPD. For example, the OPD can be generated using the Black-Scholes model and applying European call option terms, where the lender is considered the seller. A European call option requires the seller of the option (i.e. then lender) to fulfil the contract by accepting a long position in the underlying instrument (i.e. the equity in the house). For this the lender receives a premium, being the value of the OPD parameter. Using Black-Scholes the value of the OPD parameter at the start of the valuation period T(i) for a 100% equity holding is determined by: FullOPDT(i) = erKN(-d2) -SN(-dl); where K = the strike price, Asset_ValueT(i) x (hurdle_rate+1); S = price at start of the period, AssetValue T(i); r = risk free interest rate, annualised and continuously compounded; e = Natural log; d1 = [ln(S/K) + (r+.5o 2 )t1/oVt; o = is a standard deviation volatility parameter; N(x) = a standard normal cumulative distribution function; d2 = d1 - oVt; and t = the valuation period in years, being T(i + 1) -T(i) The standard deviation a represents the volatility of the AssetValue parameter over time and for property prices in the standard deviation in property prices. The cumulative normal values associated with d1 and d2 are the probability that a normally distributed variable with a zero mean and a standard deviation of 1.0 will have a value equal to or less than the d1 or d2 parameter. If the cumulative distribution of all values from oo to + oo, has maximum normal value = 1.0, for any value of d1 considered, part of the whole must lie at or below the value and the remainder must lie above it. For example, if N (d1) is 0.7422, for d1 = 0.65, then 0.2578 of the total area under the curve must lie at values greater than 0.65. Normal distribution is symmetrical, so the same percentage of the area under the curve that lies above d1must lie below -dl. The standard normal cumulative distribution function used is: 1 X zz N(x) = e dz N(x) is the cumulative probability distribution for a variable that has a standard normal distribution with a mean of zero and standard deviation of one. It is the area under the under the standard normal density function from -oo to x and therefore gives the probability that a random draw from the standard normal distribution will have a value less than or equal to x. For example, using the following values for the parameters: S, Asset_Value T(i) = $700,000; hurdlerate = 5%; K, Asset_Value T(i) x (hurdle_rate + 1) = $735,000; r, risk free rate = 4%; o, volatility = 3.5%; and t = 1 year. This generates FullOPDT(i) = $5472 If 20% equity is kept by the lender the actual value of the OPD parameter is determined to be OPDT(i) = $5472 * 20% = $1094 for a valuation period of 1 year. Many modifications will be apparent to those skilled in the art without departing from the scope of the present invention as hereinbefore described with reference to the accompanying drawings.

DESCRIPTION OF THE DRAWINGS Preferred embodiments of the present invention are hereinafter described, by way of example only, with reference to the accompanying drawings, wherein: Figure 1 is a block diagram of a preferred embodiment of an apportioned financing system according to the present invention; Figure 2 is a block diagram of the components of the system; and Figure 3 is a flow diagram of an origination and service process performed by the system, including shares of equity to and from investment pools at origination and post origination.

Claims (6)

1.An apportioned equity financing system including: a funding component for receiving asset value data representing the value of an asset, and determining lender value data representing a percentage of the asset value to be held by a lender, before being sold into a pool for investors, and borrower value data representing a percentage of the asset value to be held by a borrower. Also, in the case of owned assets where a percentage of the asset is wished to be sold to investors into a pool a way of facilitating this by way of determining asset values. an Option Payment Deposit (OPD) component for generating option payment data representing an option payment value to be paid by said borrower to said lender, before being passed through to the pool for investors, and for processing payment of said Option Payment Deposit value to said lender; a valuation component for monitoring a valuation time period, and at expiry time of said period, for determining whether the said asset has appreciated above a predetermined rate, and for processing return of the Option Payment Deposit (OPD) to the borrower if said predetermined rate is met or to be appropriated by the investment pool if the valuation hurdle has not been achieved by the valuation date.

2.The apportioned equity financing system as claimed in claim 1, wherein the Option Payment Deposit data is determined on the basis of said asset value data, said valuation time period, the predetermined rate, the lender or owner value data, and valuation data associated with the said asset.

3. The apportioned equity financing system as claimed in claim 1 or 2, wherein the Option Payment Deposit data is generated using an options pricing or derivatives pricing process.

4. A loan process including: determining an Option Payment Deposit value to be paid by a borrower to a lender using an options or derivatives pricing model; and determining, after a valuation time period, whether the Option Payment Deposit value remains with the borrower if the value of an asset, secured by the lender, has appreciated above a predetermined rate.

5. A way of structuring investment pools so that equity is arranged by value and geographic location at initiation and adjusting value in those pools referencing supply and demand and valuations. Including pools that offer capital gains and/or rental returns and a combination of the two.

6. A method whereby owners can sell and buyback equity in their property, be it residential or non-residential.