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Wednesday, October 29, 2008

Shared Appreciation Mortgages

Not too long ago, in response to a suggestion for a mortgage foreclosure voucher program, I said:

Whatever plan is ultimately implemented to stave off foreclosures, should taxpayers demand a share of any profit (equity) the bailed out homeowner makes if the house is sold later, much like the equity stakes taxpayers will have in banks that are bailed out? ...

My impression from comments is that people do not favor this approach.

Here's Andrew Caplin , Thomas Cooley , Noel Cunningham and Mitchell Engler in the WSJ:

We Can Keep People in Their Homes: ...[W]hile the rescue plan may help the balance sheets of financial institutions, it does nothing to help the balance sheets of households. Their problems must be addressed.

The way to do so is through the shared appreciation mortgage, or SAM. The concept is simple: Homeowners are offered the chance to write down a portion of their mortgage debt, but at the same time, they are required to share future appreciation gains with those who helped them out. ...

By the time housing prices stabilize, as many as 20 million households may be upside down on their mortgages, creating incentives to default.

These defaults set in motion a vicious cycle. Foreclosure is a slow and costly process. Foreclosed properties diminish the worth of nearby homes, driving yet more homeowners into default. Taxpayers are the next casualties. ...

The federal government needs to give taxpayers an ownership stake in the future. The SAM does just this. For example, a homeowner unable to support payments on a house purchased for $200,000 that today is worth only $150,000 might be offered a write-down of up to $50,000. But this would not be a free lunch.

With the SAM, once the value began appreciating above $150,000, the mortgage holders would be due their share. ...[O]ne way to give lenders a share of the upside would be to pay back some of the write down if the house is later sold, in the scenario above, for more than $150,000. This is a model in which both parties benefit, preventing default while giving future taxpayers a fighting chance at some real upside to the investment we're forcing on them. ...

The SAM was pioneered by banks in the U.S. some 40 years ago, but it has been allowed to languish due to an archaic, IRS-imposed block. (The IRS hasn't ruled whether such a contract is a mortgage because it combines elements of equity and debt.) This block could be removed at the stroke of the Treasury secretary's pen. ...

    Posted by on Wednesday, October 29, 2008 at 12:24 AM in Economics, Financial System, Housing, Policy | Permalink  TrackBack (0)  Comments (23)


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