Home Equity on Steroids: A Proposal

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Here’s an intriguing idea: A bill in Congress would enable homeowners to become only partial owners of their homes to reduce their monthly mortgage payments. The downside? Well, it would mean giving up some or all of the equity in their houses.

The legislation was introduced on Sept. 29 by U.S. Rep Gary Miller (R-Calif.). The bill is called the “Strengthening FHA Through Shared Equity Homeownership Act of 2010 (H.R. 6256).

What’s included in the legislation and what are its chances of passage? Structurally, the bill would see the Federal Housing Administration (FHA) administer a program to let homeowners sell a piece of their property to investors. In return, the investor would get partial ownership of the house.

Call it the stock market on steroids. Just like someone who owns Apple (Stock Quote: AAPL) or Google (Stock Quote: GOOG) stock these days, the investor would participate financially in any upward appreciation in the value of a given home. Of course, if the house depreciates in value, the investor is on the hook for that, too.

Money from investors must go toward principal payments on the home loan, and the investable amount can’t exceed 40% of the home’s equity share (the homeowner must retain a 60% equity share in his or her home).

Miller calls it a win-win, for the investor, the homeowner, and the FHA.

“At no cost to the taxpayer, my proposal contains a potential two-fold benefit,” Miller said in a statement. “Decreasing the Loan-to-Value rates will result in lower monthly mortgage payments, thereby reducing the risk of homeownership. By mitigating the risk for homeowners, this will also decrease FHA’s exposure to volatility in the housing market.”

Essentially, “shared equity” means selling the future value of your home for some quick cash today. The investor would “help” the homeowner with their mortgage, resulting in lower monthly mortgage payments. That’s an interesting option for millions of homeowners struggling to pay their bills.

According to the U.S. Center for Housing Policy, one in 10 mortgages in the largest 100 hundred U.S. housing markets is already delinquent. Millions more are at least 30 days late on their mortgage payments and likely wonder how they can get out of the financial straightjacket their home payments have put them in.

Under the proposed bill, homeowners wouldn’t be able to just take the money and run. The investable assets couldn’t be used to pay closing costs or for a down payment on a new home. That would help keep homeowners in their homes and likely cut out the fly-by-night operators looking to swoop in, make a quick kill, and help contribute to the deterioration of residential neighborhoods.

Miller may see the prospects of his bill passing improve if the November elections prove the pundits right and the House changes over to Republican hands. The GOP would likely be looking for a popular piece of legislation to pass (to prove the party’s populist bonafides) and H.R. 6256 certainly fits the bill.

For people with some equity left in their homes, and who are looking for lower mortgage payments, the Miller bill may be manna from heaven. We’ll see if Congress agrees.

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