Posted by Lisa Hochgraf
In late May, NCUA issued a legal opinion letter stating that credit unions are permitted to offer shared appreciation loan modifications for members struggling to make their mortgage payments so long as these modifications are conducted in a safe and sound manner. A shared appreciation mortgage is a home loan offered with a very low interest rate, or that forgives some principal, in exchange for a share in the home's profit at its sale. In other words, with a shared appreciation mortgage, homeowners are offered the chance to write down a portion of their mortgage debt but, at the same time, they are required to share future appreciation gains with those who helped them out. In the current economy, anything that helps CUs help struggling members is probably worth a good look. (Read "Responsible Debt Relief" from Credit Union Management magazine, which describes RIT Professor Robert Manning's take on why forgiving some debt may well be worth it.) On the other hand, shared appreciation mortgages are not without their drawbacks. For example, as I read up on SAMs, I found it likely they could face the same problem faced by another kind of specialty mortgage--the reverse mortgage: a high potential for backlash. Some people charge that the fees associated with reverse mortgages are too costly for borrowers--and that the children of seniors who take out a reverse will be disappointed when they find out that all the equity in their parents' home has been mined before they could inherit that stored wealth. (CUES members can download our reverse mortgage briefing here; non-members can download the briefing's executive summary. Also read Christian Mullins' Skybox post about reverses.) In similar fashion, consumers could be disappointed when it actually comes time to give their shared appreciation mortgage lender a portion of the proceeds from their home sale. But I don't consider myself a true lending expert. So I also checked in about SAMs with someone who is: CUES member Bill Vogeney, SVP/chief lending officer at $2.8 billion Ent, Colorado Springs. (Read my recent post about Vogeney.) Here are his thoughts on the matter:
"Still, I'd be concerned about what kind of incentive the borrower would have to keep their house in tip-top condition. Would they invest $7,500 in a new roof in three years? Would they change the carpeting if they knew the credit union would get half the increase in the value of their home by doing so?
"Better yet, does this seem like a good idea, but one that few consumers would agree to? Foreclosures today are happening to people:
"1. Who lost their job. A SAM might not allow them to stay in the house anyway, if they have no income.
"2. Who bought way too much home to begin with, hoping to flip it. When they can't afford the mortgage even being fully employed, and the allure of the big profit goes away, will they be willing to stay in the home for the long haul?
"3. Who are only looking at today's value, that they're upside down. It's always happened with auto loans: People wake up one day, try to trade, and find out they're $5,000 upside down. They make a very short-sighted decision. Not sure that the short-sighted thinkers will look to shared appreciation as a solution.
"I could be way wrong," Vogeney concludes. "It could be the solution for many credit unions. It probably is worth considering for those credit unions in the worst-hit areas."
What's your take on shared appreciation mortgages? Help or hindrance?
Lisa Hochgraf is board/operations editor for CUES' Credit Union Management magazine and edits the CUES Tech Port e-newsletter, News to Go.
