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To Save Mortgages, Should We Share Them?

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It’s been almost five years since the housing bubble burst. And still the long sought-after recovery is nowhere in sight. Nearly 11 million households owe more on their mortgages than their houses are worth.

Lenders foreclosed on more than 680,000 homes in the first three months of 2011, according to RealtyTrac. Yet banks remain so overwhelmed by the tide of failed loans that three of the largest ones recently failed out of the federal loan modification program (which itself has helped only a small fraction of needy families avoid foreclosure).

In this environment, it’s understandable that frustrated homeowners and lenders might ask: Isn’t there some way out of this? And isn’t there some way to make sure a crisis like this never happens again?

“The crisis has been dealt with very badly,” says Andrew Caplin, an economics professor at New York University. “Every single policy has pushed people further away from re-entering the U.S. lending market.”

Caplin thinks he has an answer. In fact, he’s been talking about it since 1995. It’s called the “shared appreciation mortgage.” The idea is to encourage banks to lower homeowners’ monthly payments by letting them share in the home’s rising value over time. In exchange for lowering the homeowners’ interest rates and/or principal, lenders get more assurance that the loan will eventually be repaid plus an equity stake in the home, which they can redeem when the home is eventually sold. (Credit.com’s Adam Levin wrote about shared appreciation mortgages in a recent column, Play It Again, SAM.)

Caplin thinks the shared appreciation mortgage is the perfect tool to lead us out of the current mess. He also thinks it could eventually replace the 30-year mortgage as America’s loan of choice.

Sounds simple right? Well, not exactly. While technically legal, shared appreciation mortgages have never caught on, due partly to an arcane IRS ruling from 1983 that, for all practical purposes, bans them.

“Get rid of the tax barrier and you could actually implement this today,” Caplin says.

Others think that’s not such a great idea. They see shared appreciation mortgages as potentially helpful in helping current homeowners make their loans more affordable. But as a replacement for 30-year, fixed-rate mortgages, which over the last 75 years have played a huge role in building the wealth of the American middle class?

Skeptics say that’s taking a good idea and pushing it too far.

“I do think it has some potential merit,” Barry Zigas, director of housing policy at the Consumer Federation of America, says of shared appreciation mortgages.  “But to say these things should replace the 30-year fixed-rate mortgage? I think it’s a big leap.”

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Image: Aidan Jones, via Flickr.com

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