Business Week on Equity-Sharing Mortgages

In a story this week, Business Week reports on family members helping out by taking an equity stake in their younger/poorer relatives' homes. This is a topic that I had addressed a while ago on this blog, within the context of hedging home equity risk.

The following two paragraphs appears toward the end of the BusinessWeek article:

At the moment, shared equity financings are largely ad hoc legal agreements negotiated between well-off parents and their young adult children. There was an attempt in the 1970s to popularize "shared appreciation mortgages," but they never took off because the terms were unfavorable to investors.

In the next couple of years a more formalized shared equity arrangement could get new life. At least that's the vision motivating real estate scholars like economist Andrew Caplin of New York University. He and a number of other experts are designing standardized shared equity mortgages that would allow outside investors to buy a piece of the equity gain. Caplin estimates that about 25% of first-time home buyers could find such arrangements attractive. When they do come along, investors in it for the money will extract stiffer terms than mom or dad.

Even though I had known Caplin's Psychology and Economics work, I was not aware of this literature on housing partnerships. This is of course reminiscent of some of the mutual/musharaka models such as the Islamic housing coop in Canada. I wonder if this will soon become a more viable (and more Islamic, as some would argue) alternative to the bad replication of mortgage loans currently being provided via multiple structured sales or leases.