Do alternative forms of homeownership, such as shared equity models and rent-to-own programs, present viable alternatives for future homeownership? Can they be taken to scale in a way that can encourage stabilization of neighborhoods and housing markets?
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As the housing crisis in America enters its fifth year, there is no end in sight. Housing starts, the measure of the health of the housing industry, remain moribund. The bottom has not been reached and signs of a recovery are ephemeral. Zillow predicts a decline of “just 0.4%” in the next year as if a further erosion of value is a victory of sorts.
Too many homeowners have given up hope of ever recovering any equity from their homes. The number of homeowners who have not made a payment in more than two years now totals 600,000 and is growing. Banks have elected to “pretend and extend” these defaulted loans rather than foreclose and book a loss that will erode their capital reserves and expose them to takeover by the FDIC. If decent law abiding citizens who live next door to these scofflaws decide to stop making their payments, this country will face another wave of ruinous decline of property values. We are at the edge of a precipice. A method must be created to bring homeowners, whose equity has been wiped out, back into the game where they have a chance to once again build equity.
One solution is a Joint Appreciation Mortgage that resets the existing mortgage to current market values and allows the homeowner who makes his payments to “participate” in any appreciation over the reset value. Simply by making payments, the homeowner can earn 40% of the increase in value over today’s price. To do so the lenders will need to bifurcate the existing loans into good and bad portions. The good portion is re-written as a new mortgage at today’s low rates (3.26% for a 30 year fixed mortgage). The bad portion (the amount over today’s value) is re-written as a 1% interest only loan due in 10 years. Rather than write it off and take a loss, the government can allow the lender to trade this bad portion for shares of stock in a new private company, JAMCO. These shares could be booked as a Contingent Asset on their balance sheet and the value determined downstream when the recovery arrives. A simple piece of legislation, at no cost to the taxpayer, would allow for this accommodation.
Allowing American families to develop equity and recapture “skin in the game” would stop the decline and turn housing values in the right direction. There will be a recovery someday. Why not now?
Robert J. Cristiano, PhD is the Real Estate Professional in Residence at Chapman University; a Senior Fellow at The Pacific Research Institute; and President of L88 Investments LLC.
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