Paul L. Caron

Friday, October 31, 2008

WSJ: Using Shared Appreciation Mortgages to Solve the Housing/Mortgage Crisis

Wall Street Journal:  We Can Keep People in Their Homes:  Let Lenders Profit Later For Easing Terms Now, by Andrew Caplin (NYU), Thomas Cooley (NYU), Noel Cunningham (NYU) & Mitchell Engler (Cardozo):

The world's turned upside down. For generations of Americans, family homes were assets to be bequeathed to our children. Today, instead, we are proposing to leave them billions of dollars in long-term debt issued by the federal government to prop up a housing market gone bad. This is unfair.

Moreover, while 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. ...

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. The details of the write down and the appreciation sharing could be tailored to different circumstances. But one 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. ...

Appreciation sharing is a cost to the borrower. Thus, if the terms are set correctly, those with the means to get through the decline in their collateral without giving up some of their upside will find it in their interest to do so.

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. ...

SAMs are the new deal in housing that our children need.

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