by Lew Sichelman
Shared appreciation mortgages, a loan product that gained some popularity three decades ago before fading away, could be making a comeback of sorts as a tool that will allow local communities provide affordable housing that will remain affordable over time.
Shared appreciation mortgages, or SAMs as they became known, are loans in which someone puts up all or some of the cash for a home buyer's downpayment in return for a portion of whatever amount of appreciation takes place in the value of the property between the day it is purchase and the day it is sold.
In the 1970s and '80s, SAMs were used as a way to make housing more affordable. But in those days, it was often a friend or family member who put up the cash.
Now, the idea has resurfaced in a somewhat different form. Now, a local housing authority or another city agency, or perhaps even a nonprofit, puts up the dough and shares in the profits when the house is sold. But instead of pocketing the gain, so to speak, it uses the profits to help another worthy family buy a house or keeps the return in the house so it remains affordable. That way, according to the Center for Housing Policy, it's "one generation helping another."
Jeff Lubell, who is executive director of the Center, calls shared equity "a unique approach to affordable housing" because it permits communities to provide for people over time while at the same helping families build individual wealth "in a predictable and potentially life-altering way."
In return for providing funding, moreover, the public's share of the appreciation can be used in one of two ways -- either by returning it to the government in the form of a cash payment that can be used by another family having difficulty raising enough money for the downpayment or by keeping it with the house, thereby reducing the cost of that home for the next purchaser.
"By sharing the gains in home price appreciation with the public investor, shared equity results in substantial benefits now and for years to come," says the Center, which is the research arm of the National Housing Conference in Washington.
"Home buyers benefit from a substantially lower home price and the opportunity for significant home equity gains. Local communities benefit by retaining vital workers who otherwise couldn't afford to live in the communities they serve. And, by ensuring that the public's investment keeps pace with the housing market, shared equity strategies allow governments to help generations of families achieve homeownership with a single initial investment."
Another term for shared equity is "subsidy retention," meaning that every time a subsidized owner sells his house, the subsidy he received is returned to the jurisdiction. In some cases, the original buyer also agrees to give back a percentage of the appreciation in the house.
Consequently, cities and counties can serve more families with the same amount of funds. And if home prices rise, they get back more money so there may be no need to increase their funding. Or at least by not as much.
Say, for example, someone buys a $200,000 with the help of a $25,000 subsidy. When the buyers sells five years later, he gives back the subsidy so the jurisdiction can use the money to help someone else who is short on cash. And in some cases, the first buyer also gives back some of the gain. So if the $200,000 house sells for $300,000 in five years, a percentage of the gain goes back to the city, too.
Shared appreciation schemes can take on many forms. The city of Santa Cruz, Calif. collects 1 percentage point of home price appreciation for every percentage point of the purchase funded by funded by its second mortgage program. In Vermont, the Champlain Housing Trust uses an appraisal-based formula in which the seller get 25 percent of the appreciation and the trust gets the rest.
The Center, which works to broaden understanding of America's affordable housing challenges and examines the impact of policies and programs developed to address these needs, has worked with Rick Jacobus of Burlington Associates to develop an online tutorial on shared appreciation and several programs that have worked for various localities. The site is nhc.org/housing/sharedequity.
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