Can this be Done? Using WRAP (AITD) Type of Financing Arrangement

[Michael Morrongiello]

Situation:
Have an elderly property owner who has owned their residence for 20+ years.
Current value in the $600K to 650K range +/-
They LIVE in the home.
They have an existing 1st lien on it with a current balance of Approx. $200K @ 4.0% that is a FIXED rate, Fully Amortizing Mortgage they took out about 10 years ago. Its now 10+ years into its 30 year term where more and more of their monthly payments of P & I are going towards principal reduction.
Their payment of P & I is roughly $1,200 per month.

Problem:
They want to PULL out $150K (as Cash out) or so of their equity in the property.
They are semi retired and SELF EMPLOYED and because of challenging income documentation they
would have difficulty obtaining financing traditionally AND the Current Interest rates other lenders
are quoting are in the 6.5% to 7% or Higher range. They are opposed to paying of that existing LOW 4.0% 1st lien to replace it with
the higher interest rates currently being offered.

Proposal:
We might consider ORIGINATING a Wrap Around Mortgage for them to secure a Wrap Around Note
for $350,000 (plus some cost and expenses) at a 7.0% Interest rate on an INTEREST ONLY basis which would
encircle and include the $200K underlying 1st lien payment. The I/O payment on the $350K WRAP Note @ 7.0% would be $2,041.67
Then from that Payment COMING IN - the $1,200 payment would have to be made on the existing underlying 1st lien.
The TERM would be for 5 Years (then would mature)

Thus its costing the Borrower $841.67 per month EXTRA to Borrow the $150K in cash out they seek
That is great BENEFIT to them
BENEFIT to the Lender; Only putting out $150K vs $350K and
The WRAP Note which has Interest only payments coming IN will capture the continued AMORTIZATION of the underlying 1st lien
as those payments or P&I are made.

Borrower at any time in the future can be restored back to their 4.0% Interest rate Note by paying OFF the DIFFERENCE Between the $350K Wrap  Around Note and whatever their UNDERLYING 1st lien balance wold be at that time.

Concerns:
State - CA or NV
Can this be done?
What about the borrowers age, occupancy status, etc.
With the WRAP Note/Loan:  Should there be concerns over the INTEREST ONLY  repayment terms and the BALLOON payment due in 5 Years?
What about other issues?