Academic journal article Journal of the International Academy for Case Studies

Habitat for Humanity: Can Mortgage Asset Utilization Be Improved?

Academic journal article Journal of the International Academy for Case Studies

Habitat for Humanity: Can Mortgage Asset Utilization Be Improved?

Article excerpt

CASE DESCRIPTION

The primary focus of the case is mortgage valuation and building models from income statements that lead to cash flow projections under differing assumptions. This case is suitable for 2nd level undergraduate corporate finance courses (senior level), first or second level graduate corporate finance courses, or financial modeling courses. Levels of technical sophistication using Excel will enhance possible outcomes. The model and graphs used below to arrive at projections may be more sophisticated than some courses would require, particularly the use of the "spinner" in Excel to change values in the graphs. Preparation time: 5 hours.

CASE SYNOPSIS

The Board of Directors of Habitat for Humanity (HFH) of Bridgeport, Connecticut asked Fairfield University's MBA director to put together a team to study the possibility of securitizing some of its mortgages. The professor led MBA team research within the local organization and HFH organizations in other parts of the country. They discover that mortgages are routinely sold at varying discounts from face value. Using financial projections from HFH staff, the case requires the creation of a dynamic plan and forecast that shows how many additional houses could be built in the coming years under varying parameters such as sale price of the mortgages at different discount rates from face value, number of mortgages sold, and delinquency risk. Other issues raised in the case include precluding HFH mortgagees from selling their homes at a substantial profit and managing increases in property taxes.

INTRODUCTION

Mike Guarnieri and Hank Schilling, Board members of Habitat for Humanity of Coastal Fairfield County (HFHCFC) were interested in looking at how to better utilize the mortgage portfolio held by HFHCFC. In March of 2006 Mike obtained approval from Bob Knebel, CEO of HFHCFC, to approach his alma mater in order to propose a research project that would have MBA students explore possible ways to leverage the mortgage portfolio.

HFHCFC has been building homes in Bridgeport, Connecticut since the early 1990s. They currently hold 93 home mortgages in their portfolio. Some are pledged as collateral for loans. A few mortgages have been "sold" to third parties in their entirety or for part of their terms. Mike wondered if some of these mortgages might be "securitized" and sold with the proceeds used to ramp up construction beyond what could be accomplished with donations alone. When he spoke with Dana Wilkie, MBA coordinator at the university, about the possibility of putting together a team of MBA students to examine HFHCFC's mortgage portfolio, Dana was enthusiastic. "I'm sure I can put together a team of students. I also have a finance professor in mind who I think will be willing to work with them," she said.

BACKGROUND

Habitat for Humanity (HFH), founded in 1976 as a Christian based organization dedicated to providing affordable decent housing for the poor, built its 200,000th home in 2005. The homes are built with volunteer labor, some of it professional workers such as carpenters, electricians and plumbers. Prospective home buyers are required to invest "sweat equity," typically 500 hours of construction work on their home or others, to be eligible for a Habitat for Humanity mortgage. Funds are donated to finance the purchase of land, equipment and services that cannot be obtained through charitable donations. From humble beginnings in Georgia, HFH has become an international organization active in more than 3,000 communities throughout the world with over 1,600 affiliates. The personal involvement of former U.S. President Jimmy Carter and his wife Rosalyn beginning in 1984 resulted in national and international exposure of the organization.

HFH consists of many local chapters with their own independent organizations following the Habitat model of building homes with community volunteers and donations. …

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