Shared Appreciation Mortgages reviving June, 2004 By Jim Woodard Shared appreciation mortgages (SAMs) are again emerging in today’s real estate marketplace. This is a special type of mortgage loan where the lender charges a fixed rate of interest plus a share of the profit derived from the future sale of the property. It’s a concept that became somewhat popular years ago, but then faded away. Currently, it’s being used by developers as a form of financing the construction of housing projects – particularly those perceived to be risky investments, according to a report carried in Grant Thornton’s “Building Business.” This type of arrangement presents an interesting challenge regarding taxes. How should the borrower treat the payment of the share of appreciation to the lender? Is the payment a deductible interest expense? Or does the sharing of profits from the sale of the property create a partnership for tax purposes between the borrower and the lender? “If it’s an interest expense, then the borrower would most likely have an ordinary tax deduction,” said Jerry Williford, a tax executive director with the Grant Thornton office, an accounting advisory firm. “On the other hand, if the lender is deemed to be a partner with the borrower, then the lender will have less capital gain on sale and the tax effect can be significant.” He noted that IRS rules and court cases in the past involving SAM arrangements indicate the borrower and lender are not partners for tax purposes. “Taxpayers should be aware that the IRS could raise the issue and argue that the lender is a partner with the borrower with the payment of the share of appreciation not being deductible as interest,” Williford said. * * * Recognizing Income of Seniors A new mortgage loan program that recognizes the income of seniors who live with their adult children has been launched by Fannie Mae. It’s called the “Seniors and Family Together” pilot loan program. There’s an increasing number of seniors taking up residence with their offspring, due to cultural traditions of immigrants and child-care needs, among other reasons. Lenders generally have not included income from grandparents when qualifying a family for a mortgage loan, even when they consistently contribute to household expenses. The only time that income is usually considered is when the seniors explicitly co-sign as borrowers on the mortgage note. The new Fannie Mae product allows all the senior’s income to be counted, up to 30 percent of the principal borrower’s income, without the senior being listed on the note. The program is currently available only in Florida and Mississippi, but is expected to expand to other states soon. * * * The Impact of Personal Credit Scores Your current credit score could have a significant influence in the amount of mortgage loan and terms you can qualify for. This, in turn, can affect your ability to purchase a home and your overall financial situation. Credit scoring is a system used by mortgage lenders to help determine your ability to repay a loan. Information about you and your credit experiences, such as your bill-paying history, the number and type of accounts you have, late payments, collection actions and other factors are collected from your credit report and other sources. Using a statistical program, creditors compare this information to the credit performance of consumers with similar profiles. A credit scoring system awards points for each factor that helps predict who is most likely to repay a loan. The total number of points is your credit score. Since your personal credit score is so important in your quest for homeownership and obtaining the most favorable mortgage, it should be checked periodically to be sure the number reflects accurate data. There are three key agencies involved in compiling and reporting scores – Equifax (phone 800-685-1111): Experian (888-397-3742): and Trans Union (800-916-8800). An interesting study, recently conducted by Experian, revealed that consumers with at least one open mortgage have an average score of 716. Whereas, consumers without an open mortgage have an average score of 667. It was determined that having a mortgage shows potential lenders you have been considered creditworthy in the past, and therefore you are likely to be responsible in handling future financial responsibilities. “Whether you are applying for a new mortgage or refinancing a current mortgage, your credit history plays a key role in the approval, interest rates, and terms of your new financial accountability,” an Experian report stated. “If you have a high score, you will generally be offered better rates and terms on your mortgage. That can result in considerable savings over the term of a loan.” * * * Coming: Zero Down Payment mortgages Zero down payment mortgages for first-time home buyers may soon become a reality. A subcommittee in the House of Representatives has cleared enabling legislation that would make this possible. The bill would allow buyers to roll the downpayment and closing costs into the total loan amount. This would be when the mortgage is guaranteed by the Federal Housing Administration (FHA). Some legislators resist the idea, saying that families taking advantage of the offer could end up with negative equity and they could become trapped in communities with declining property values. With that thought in mind, the bill now includes strengthened eligibility criteria for the zero-down financing. * * * Home prices continue upward trek Median home prices in most metro areas are continuing to experience above-average appreciation, according to a recent survey by the National Association of Realtors. “The strong home-price growth pattern is well established. It’s a simple matter of supply and demand,” said David Lereah, NAR’s chief economist. “We continue to have more home buyers than sellers in most areas of the country. That results in tight housing inventories and higher rates of home price increases.” The national median existing-home price is up by about 6.5 percent above the median price a year ago. “Normally, overall home prices appreciate about two percentage points above the rate of inflation, but we’ve been well above that for the past three years,” said Walt McDonald, NAR president. “Although the rate of price growth is expected to slow, it should continue to rise faster than historic norms both this year and next. In some areas we are seeing a surge of first-time buyers at the lower end of the market, but many of them have gone through a period of local economic weakness, primarily in the labor markets, and they also have an adequate supply of homes from new home construction. “Generally, these areas are now recovering jobs and should gradually turnaround. In other words, they are not harbingers of local price bubbles because those area home prices were never inflated to begin with,” McDonald concluded. * * * Impact of rising interest rates Slowly rising interest rates are not having an adverse effect on the value and salability of homes, according to most industry experts. Values will continue to rise and sales activity will remain strong. Even though mortgage interest rates are projected to climb to 6.6 percent by the end of this year, and rise to 7 percent next year, those increases will have minimal effect on home sales, according to David Lereah, chief economist for the National Association of Realtors. “Interest rates are rising because the economy is expanding, and that’s a good thing,” he said. “All factors driving our economy point to a healthy expansion of the housing market this year and next year.” It isn’t just low interest rates that have produced the strong housing market. Immigrants, second-home buyers, Baby Boomers, and now emerging Echo Boomers (kids of boomers) are contributing to the strong growth in home sales and values. The emergence of this last group will probably produce a shift over the next decade from a market dominated by luxury homes to one fueled by entry-level and moderately priced homes. * * * Purchase then Remodel trend A recent study revealed that 52 percent of home buyers had completed one or more home improvement projects within the first year of purchasing their property. Most of them were planning at least one more project within the next year. An increasing number of these projects are financed with a combination home purchase-remodeling mortgage. The most frequent products used in the projects were paints, lumber, building materials and floor coverings, the survey noted. On average, home buyers spent about $3,100 during the first year. Buyers of older homes spent $2,000, while those who bought new homes spent an average of $5,000. Owners of older homes often cited a desire or need to replace worn-out or old materials, while owners of newly constructed homes were most often seeking to beautify the houses. Purchasers of both types of homes reported they did improvements to support new features and change the décor. The study was conducted by the not-for-profit Home Improvement Research Institute. * * * Reverse mortgages gaining popularity Reverse mortgages are becoming more popular with homeowners over age 62. The number of these loans surged 39 percent last year and the number of inquiries about currently available reverse mortgage plans jumped by nearly 30 percent, according to the National Reverse Mortgage Lenders Association. Reverse mortgages are a special type of loan designed to boost the income of senior homeowners by tapping the accumulated equity in the homes. Instead of making monthly payments on the loan, the homeowners receive a monthly check. And that tax-free income can continue as long as the senior continues to own and live in the home. If preferred, the senior can receive a lump sum of cash, or a line of credit. It’s a way to tap an owner’s home equity to generate income. The amount of monthly income a senior receives depends on the current and projected value of the property, and his or her age and life expectancy. A new rule implemented by the Department of Housing and Urban Development (HUD) has recently sparked more interest in these loans. Seniors who want to refinance their reverse mortgages to take advantage of recent equity gains will now be able to do so without paying for additional Federal Housing Administration (FHA) insurance. This rule became effective April 26. Previously, borrowers were charged 2 percent of their home’s new value when they refinanced, having already paid 2 percent of the property’s value when they obtained the original loan. The new rule keeps them from shelling out more than 2 percent of the difference between the claim ceilings on the two mortgages. Also, borrowers refinancing within five years of the original loan are no longer required to attend counseling sessions. | 
