FHA Mortgage Guide

In my Realty Times column the question is asked: Should The FHA Own Part Of Your Home?

When I first saw the proposal by Rep. Barney Frank (R-MA) to create an FHA program that would assist homeowners (and thus lenders) who are in trouble I was leery of the concept. As the column explains:

“To make the program financially viable, Frank suggests that the FHA should get a piece of the action: Under his plan, H.R. 5830, there would be a declining percentage fee on any profits to discourage short-term speculators. The fee would be equal to 100 percent of all profits in year one, 80 percent in the second year and so on for the first five years. After five years there would be an “exit” fee equal to 3 percent of the sale price.”

However, the more I look at the Frank plan the more it makes sense. Think of it as a kind of FHA equity sharing — you give up some equity in exchange for some funding.

While this may seem like an odd concept in the U.S., it’s actually a modification of the practice of some lenders overseas. Instead of charging interest, any interest, such lenders participate in the profits generated by an investment. Think what your monthly mortgage would cost if it did not include interest.

The other attraction of such loans is that if there’s a loss the lender also shares the decline. If you want to know more about the concept, press here.

My concern is this: I can imagine private-sector lenders now asking for both interest and equity — but not sharing any losses. I can also imagine lenders seeking such arrangement from borrowers with good credit.

For the private sector, the deal ought to be interest OR equity, but not both. And the arrangement for equity should be based on a sharing of profits and losses. There is at least one program to consider but when last I looked it was only open to those 65 and older.

The firm offering the program, EquityKey, says if the value of the property declines “you keep the money. EquityKey believes that real estate is a safe long-term investment. If your home loses value then EquityKey will lose the money that it has paid to you. The amount you receive from EquityKey is not a loan and doesn’t create debt; therefore, EquityKey faces the risk of loss if your home does not grow in value.”

On a lot of levels, pretty interesting.

Check out these FHA resources for more information

This entry was posted on Thursday, April 24th, 2008 at 12:06 am and is filed under FHA. You can follow any responses to this entry through the RSS 2.0 feed. You can skip to the end and leave a response. Pinging is currently not allowed.