An Interesting Idea: Shared-Appreciation Mortgages

Not too long ago, Fed Chair Ben Bernanke pointed out that the government shouldn't get too involved in bailing out the mortgage loan industry. After all, they sort of brought it on themselves. Instead of promising further rate cuts or infusions of cash, he offered some alternative options to the way that we Americans generally view mortgage lending. One of the things he mentioned was shared-appreciation mortgages. Boston.com does a great job of explaining how this type of home mortgage works:

These mortgages, which are relatively rare in the United States but more common in the United Kingdom, offer lower interest rates in exchange for some of the upside potential on the house. For example, a lender might offer a 6 percent interest rate instead of an 8 percent rate, in exchange for 50 percent of the increase in the value of the house at the time of eventual sale.

This can seem rather onerous to American home mortgage borrowers. After all, we're all about the idea that it's mine! mine! mine! But there are definite advantages. The main advantage is that you might be able to swing a second mortgage home loan (which are getting more and more difficult to come by) to refinance out of the awful loan that put you in danger of foreclosure. And you still get part of the increase in the value. It's not as thought the mortgage lender gets 50% of the total value; only a portion of the increase is at stake.

Interestingly, I'm already seeing the potential for investors to find opportunities in this as well. It would make note investors more likely to invest in mortgages again, and a more stable lending industry would contribute to other opportunities.

At any rate, a change in the way the American lending industry does its thing is definitely warranted. Government intervention will only work for so long. After that, if fundamental changes aren't made, then we'll back here again in another 10-15 years. But the fundamental change is needed on the part of the American people and their money habits as well. The mortgage lending industry would never have been able to get into the mess if we weren't compliant.

Tags: shared-appreciation mortgages, mortgage lending industry, home mortgage loan, personal finance,
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