Shared appreciation seems to have become a buzzword lately. Its proponents are treating it as gold. It is the answer to moral hazard. It is a compromise. It is a good deal for homeowners, and it is the best deal for the banks.
Is it really?
Rick Sharga, executive vice president of Carrington Mortgage Holdings, doesn’t seem to think so.
“I think anyone who says that shared appreciation is the ‘fix’ for the housing market or the overall economy is probably being a bit too optimistic,” he said on the phone Monday. “I think what it is, is trying to make the best of a bad situation.”
While he said the write down, which allows banks to write down the principal on underwater mortgages in exchange for a share of the profit should the house increase in value, is a fairer situation for both the homeowner and the lender it “certainly isn’t a cure all,” — especially when it comes to the moral hazard side of the equation.
The argument has been made over and over again that because the homeowner has to give the bank some of the money if their home increases in value after the write down, the moral hazard goes away.
But Sharga said it’s not a cure for that either. The stakes for the homeowner are pretty small. They only lose out in some potential profit-taking if their house happens to increase in value, and even then it is probably only about 25%.
“It’s a partial solution (to moral hazard),” he said. “It’s sort of like chicken soup when you have a cold. It really doesn’t cure the cold, but it makes you feel a little bit better while you’re eating it.”
But even if moral hazard is still on the table, could it be a compromise? Might the warring factors of the Federal Housing Finance Agency’s Edward DeMarco and the angry folks calling for his resignation cool off if they catch the wave of shared appreciation?
Meh. Probably not.
“My suspicion is that this program by itself won’t be enough to move Mr. DeMarco toward principal balance reductions,” he said. “It's hardly a dollar for dollar trade-off, it's still absorbing huge losses upfront if you are someone with the volume of inventory that the FHFA has against probably marginal returns in the long run.”
But, if it were, DeMarco’s biggest critic would take it.
“We would support it,” said Liz Ryan Murray, policy director at National People’s Action, who has been calling for DeMarco to be fired over his refusal to do broad based principal reductions. Though, Murray said, the group wouldn’t be supportive of any ratio higher than 75% for the homeowner and 25% for the lender.
But even if they support it in principal, they aren’t going to be the first ones to offer it up as a solution.
“It feels to me like that’s already out there,” she said. “We aren’t going to lead with that. At this point we are still waiting for any sort of indication that any sort of principal reduction going to get done.”
As for any compromises, Murray said there is no budging on her part. Since the FHFA hasn’t responded to their demands, they aren’t backing down.
“You can’t negotiate with a blanket 'no',” she said.
But she is right; the notion of shared appreciation write-downs is already out there. As HW reporter Andrew Scoggins reported early last month, a bill was introduced in the Senate that would allow underwater homeowners to decrease their principal through a federal shared-appreciation program — though it's not known when the bill will hit the floor.
"When you owe more than your house is worth through no fault of your own, relief can be hard to come by," Menendez said in a news release. "My bill aims to break this cycle by giving homeowners the relief they are looking for by working with banks to find acceptable solutions for everyone."
Under the proposed bill, homeowners would be able to reduce their mortgage principal to 95% of the home’s reassessed value, and then the principal would lower to its new value by a third each year for three years as long as the homeowner keeps making payments. The lender would get a fixed share in the equity of the home based on how much it reduces the principal, maxing out at 50%.
It’s an interesting idea, and it seems like something Murray’s group would support if the details matched up. If it ended up passing through Congress — and something tells me it probably won’t given the nasty climate surrounding the issue and housing in general — the FHFA would be forced to do it. So, a “compromise” may not be necessary anyway.
In the meantime, shared appreciation is probably not the panacea some proponents are chalking it up to be. It might be a building block toward a solution, but it won’t get us all the way there.
For that, we’ll need some serious give and take, and right now neither party is willing to budge all that much.