Loan Modification

Shared equity FHA loans? Cool!

By Gina Pogol

Rep. Gary Miller or California has introduced a bill that would establish a shared-equity home ownership pilot program through FHA. What is shared equity? Shared equity is the exchange of future home appreciation for cash today. So instead of making regular payments to your lender/ investor, you grant it a share in your home’s equity down the road. Miller says the program would lessen the risk of home ownership and reduce FHA’s vulnerability in volatile housing markets.

The bill is called the Strengthening FHA Through Shared Equity Homeownership Act of 2010 (H.R.6256). It would enable homeowners to sell a portion of the equity in their homes to investors and FHA would be the conduit. In return, homeowners and investors would share the value of any home price appreciation that occurred after the sale.

It would lower the risk for FHA and lower the monthly payment for the borrower. For example, if you wanted to buy a $200,000 home, FHA requires that you put at least 3.5% down ($7,000). But what if through the program you got an investor to put up another 6.5% in exchange for 25% of your home’s appreciation? You have a $13,000 bigger down payment and lower monthly payments than you otherwise would, the risk to the taxpayer is lessened, and the investor can make some decent money. For example, if your $200,000 property appreciates at a typical 4% per year, it would be worth over $243,000 in five years. The investor gets 1/4 of that extra $43,000 plus the original $13,000. Of course, if the property value doesn’t increase. the investor doesn’t make anything. That’s the risk he or she takes.

?At no cost to the taxpayer, my proposal contains a potential twofold benefit,” Miller says. ?Decreasing the loan-to-value rates will result in lower monthly mortgage payments, thereby reducing the risk of home ownership. By mitigating the risk for homeowners, this will also decrease FHA?s exposure to volatility in the housing market.”

It’s an idea that might be exactly right for the times.

Full post as published by FHA Mortgage Guide on October 12, 2010 (boomark / email).