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Interesting model, you are asking the bank to be in an equity position. Are you willing to let the bank have 60% say in how much the use rent should be?
I did not understand the question completely - but I am going to assume your comment is whether the bank will have a 60% say in how much the rent should be if the house is rented out. My answer is that in this model, the bank will be concerned only about reasonably preserving the value of the house - not about how much rent the owner should collect as long as it is getting paid the monthly payments (Principal & Interest). So the bank should be only concerned that a potential renter does not have a history of vandalism or causing damage - any reasonable precaution that regular landlords take (like checking rental history).
Your formula is asking the bank to be a 60% shareholder in the house. Unless you are willing to pay a substantially higher interest rate than typical market interest rate, I don't think many counter parties (bank or otherwise) would want to be a silent partner without dividend.
Use rent is not just how much rent if rented out, but also how much rent you should pay if you decide to use the house yourself. Actually, at 60%, the bank decides whether you should be the tenant of the joint-venture building.
The upside is of course that then you don't pay interest per se, but rent instead (minus your share of the rent revenue), if the bank does allow you to stay. You won't be able to use mortgage interest deduction either.
I don't think bank would be interested in reducing their creditor position to equity position. What will happen when their share drops below 50%? You decide how much rent you pay? LOL.
I don't think you have understood my answer by your last question "You decide how much rent you pay?". As in the case of a traditional mortgage, the borrower/owner decides how much rent he "collects" if he were to choose to rent it out (and the terms of the loan allowed it). The borrower/owner has to pay the bank the monthly payment amount as per the loan terms (principal + interest) - similar to a traditional mortgage. The only difference between this "stake mortgage" and traditional mortgage is at the time of the sale.
By the way - immediate renting out is not allowed on most loans if the property is to be used as a primary residence (usually allowed after 1 year).
I've read your premise a couple of times. I think it's a dumb idea. The only reason a borrower today would agree to that is because home values are still declining. Try getting any borrower to agree to sharing part of his equity with the lender in an up cycle.
The current system worked fine for me. Borrow a specific amount at a fixed interest rate and pay back monthly. Soon I will own 100% of whatever the value is. Even when I owned 50% of the equity, I would not have wanted to give any part of it to the lender. I pay interest for the use of their money. That's enough.
I don't think you have understood my answer by your last question "You decide how much rent you pay?". As in the case of a traditional mortgage, the borrower/owner decides how much rent he "collects" if he were to choose to rent it out (and the terms of the loan allowed it). The borrower/owner has to pay the bank the monthly payment amount as per the loan terms (principal + interest) - similar to a traditional mortgage. The only difference between this "stake mortgage" and traditional mortgage is at the time of the sale.
By the way - immediate renting out is not allowed on most loans if the property is to be used as a primary residence (usually allowed after 1 year).
I don't think you fully understood his response. Why should the bank, the majority stake holder in this situation, let you, the minority stake holder live and use the house for free. Because you are trying to "share equity stake" in the venture of buying the house why would you be entitled to use of the house and not the bank without paying some type of fee.
Done!
@
2011 Aug 30, 6:01am
3. Owners do not get burned or wiped out completely in the event of a loss.
Buyers have no right to reduced Risk, they don't have the risk. They are the borrower remember? Other than both parties honoring the contract is all the buyer can expect.
If a buyer wants reduced risk, then save up their money and buy with cash.
I'm not sure why the bank would go for this. They would have to evaluate each house and decide whether it was a worthwhile investment.
The bank is not interested in making a profit this way. They would rather have a predictable security issued -- i.e. one based on predictable default rates and an identifiable bond rate. The whole point is to get assets off the books, not to put more assets on.
Comments 1 - 8 of 8 Search these comments
I have posted this on redfin forums (http:/s.redfin.com/t5/Bay-Area/What-about-us-Responsible-homeowners-left-out-in-the-cold/td-p/230886/highlight/false/page/4) - thought to share it with patrick.net users (excuse me if my responses are very late due to busy life/job):
I will call it a "stake mortgage". In a nutshell in this mortgage if a property with this mortgage type is sold - then the sales proceeds should be split between the owner & the bank proportionate to their current stake with respect to the original purchase price. The proportion to the bank should be current loan balance divided by original purchase price. So bank gets (current loan balance / original purchase price) X sales price. Remaining goes to the owner. For refinanced loans - in the above equation use appraised value instead of purchase price.
Example:
Purchase price: 500k
Initial balance (assuming 20% down payment): 400k
Current balance: 300k (so the owner has paid down 100k)
So bank's stake = 300k/500k = 60%, owner's stake = 40%
Case 1 (loss):
If house get sold for 400k - the bank gets 240k, the owner gets paid 160k. So the bank loses 60k (300k-240k) and the owner loses 40k (200k - 160k).
Case 2 (profit):
If house get sold for 600k - the bank gets 360k, the owner gets paid 240k. So the bank gains 60k (360k-300k) and the owner gains 40k (240k - 200k).
What this does:
1.The sales proceeds are distributed in a fairer manner as a proportion to the stake in the house. In case of a profit if not a lot of the loan was paid off at the sale the bank gets the profit it deserves - since majority of the money came from the bank.
2. Banks will lend more carefully - to protect themselves from a loss.
3. Owners do not get burned or wiped out completely in the event of a loss.
4. Flippers do not really make much profit if they flipped using borrowed money.
5. Most importantly owners have an incentive to stay in the house for a longer time & pay down as much as possible of the mortgage as longer time is more likely to be a profit. This will also reduce the speculation.
6. Since banks have more stakes in the real estate & the potential sale transactions & will be involved in far more transactions than the individual buyer/seller - they will be able to use their collective negotiating power to drive down the real estate agents exorbitant 6% commissions. After all - the other third party employed by the banks for real estate lending (escrow/title companies) do not charge hefty commissions.
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