Recently, there was an OP-ED in the New York Times that proposed Equity Sharing as a solution to the housing crisis. The opinion is sound and it is an attempt to forge an alliance between lenders and their borrowers, which ultimately might be the only way to fix the housing market.
Currently, lenders are at a gross disadvantage to the conditions of the real estate market (many would argue, the market that they helped create), and they are not able to fix mortgage delinquencies in the traditional manner. Distressed properties have historically been such a small percentage of the market that lenders would foreclose, dispose of the properties, and factor in the losses as a cost of doing business.
But today, there are too many properties in distress, and lenders cannot unload all of the properties that they either have foreclosed upon or which they would have historically already foreclosed. The relationship between lender and borrower appears to be at odds. But there might be a unifying solution that is “best case” for where we now find ourselves.
Equity Sharing Unites Lender And Borrower
In an equity sharing arrangement, homeowners and lenders would become partners in a long-term equity-sharing arrangement. This would require the lender to write down the existing loan to market value, while the homeowner would enter into an agreement where the lender would take a 50% interest in the property. Both parties would split any gain from a future sale, thus the solution is a best case “win-win” for each.
Here’s how it would work. Let’s say a homeowner purchased a house in 2004 for $300,000 with no money down, and the property is now worth $210,000 — a 30 percent drop in value.
In an equity-sharing arrangement, the lender would write a new loan for $210,000, retire the original $300,000 loan and, to make up for that loss, take a 50 percent deeded ownership interest in the property. The homeowner would also agree to split 50 percent of the net proceeds of any future sale of the property with the lender.
The agreement would also include a buyout provision that would allow the homeowner to “take out the lender” at any time for a pre-determined amount of money. With this additional measure, the homeowner would not feel trapped in the home and could always regain 100% ownership when the market gets stronger.
Equity Sharing Is A Solution To Our Housing Crisis
The market needs a major overhaul, and currently so many homeowners are trapped in upside down homes that they cannot sell the home they are in to facilitate a move to another. Equity sharing would provide the grease to start things moving forward again. We know that the bulk of remaining buyers are already existing homeowners, so a solution to their problem is a solution to everybody’s problem.
The banks might balk at this solution, believing that this will cost them a significant amount of their asset base. But the reality is that the asset base has already been diminished, and their chances of moving forward and generating revenue again relies on a housing market recovery. Hopefully, they will be wise enough to explore this.