In the coming two years option ARMs worth $134 billion will be re-cast according to Fitch Ratings. This means more than 500,000 borrowers are likely to face steeply higher monthly costs, costs which in many cases will lead to foreclosure.
It doesn’t have to be this way. Stop foreclosures and you can stop the widespread erosion of home values. Why? Because when a few houses in the neighborhood are foreclosed the value of all homes are impacted.
To date, efforts to halt the mortgage meltdown have been limited, but perhaps there’s a different approach to consider, one created under a law intended to benefit coal miners.
Black Lung & Equity Sharing
The Black Lung Benefits Revenue Act of 1981 (Pub. L. 97-119) made it possible for residential property to be owned by both an occupant co-owner and a non-occupant co-owner — and for both owners to write-off expenses just like any owner-occupant or owner.
Called equity sharing, such an arrangement can work like this:
Occupant Collins has a 75-percent interest in the property and a non-occupant investor, Baker, owns 25 percent. Collins pays a fair market rental to Baker for the 25 percent of the property not owned by Baker. If the property is sold, then the profits are divided with 25 percent going to Baker and 75 percent going to occupant Collins.
Under the coal miner’s bill, investor Baker can write off his share of the mortgage interest, taxes and other costs as a business expense and depreciate his 25 percent of the property. Collins, the resident, can write off mortgage interest and property taxes, but not depreciation or regular ownership expenses because he is an owner-occupant and not an investor.
“Equity-sharing would allow many owners to stay in their homes and avoid foreclosure,” says Jim Saccacio, Chairman and CEO at RealtyTrac.com, the nation’s leading foreclosure marketplace. “Lenders would benefit because homes could be saved from foreclosure. Neighborhoods and communities would be ahead because fewer foreclosures would mean a reduced number of homes for sale at distressed prices. The result would be less downward pressure on local home values.”
“Why can’t home owners sell some percentage of equity in their homes on a listed exchange?” asks Mark Cuban, owner of the Dallas Mavericks. “Why can’t I ‘Take My House Public?’”
Cuban says such deals could work like this:
- “The house is appraised by a company approved by the exchange that lists the houses.
- “‘Shares’ are set with a Par Value of 10% of the appraised value. For a $100,000 house, there are 10 shares potentially available. However at no point in time can more than 40% of the ‘shares’ in a home be sold. We don’t want the opportunity for ‘hostile takeovers.’
- “The price of the shares will of course be set by the market. In a hot market it will be set above par, in a tough market like today, it will sell below Par.
- “All Proceeds from the sale of shares MUST be used to pay down any debt on the home.”
There’s a catch here, however, which now dooms both Cuban’s idea as well as any similar approach to bail-out distressed borrowers. Equity-sharing has traditionally been designed as a way to acquire property, not as a way to refinance. Selling an equity interest in a home with an existing owner, changing the title, sets off the “acceleration” clause found in virtually all mortgages.
If equity sharing is to alleviate the foreclosure problem, then lenders will have to agree to a new and different form of loan modification. Instead of enforcing due-on-sale clauses, they’ll have to accept a change of title and new ownership.
Is this a problem for lenders? Not hardly. With the use of equity sharing lenders could avoid foreclosures and save an estimated $40,000 to $80,000 for each property which does not go to auction. Local home values would be maintained, meaning that the value of the lender’s security would be protected and conserved. Properties would be easier to refinance at lower rates with the addition of a strong equity partner.
While Cuban offers the idea of a formal marketplace, equity sharing deals could also be done informally among family members, companies with employees who need assistance, community groups, religious organizations or any two people with shared interests.
Oh, and since you’re wondering, why are the tax benefits for equity sharing found in legislation designed to aid coal miners? Because Washington works in strange and mysterious ways.
Published originally by RealtyTrac.com in November 2007 and posted with permission.