A new idea to help property market recover
- 13 Jan 2011
Recovery in the residential property market would happen a lot faster if lenders were more willing to share risk with distressed homeowners.
So says Sandy Geffen, a director of Sotheby’s International Realty in South Africa, who notes that there are still thousands of homeowners in trouble as a result of the recent recession.
“Job losses mean many can’t make their monthly home loan repayments, and the 2009 slump in prices means many can’t even sell their homes for as much as they owe on them. As a result, the number of distressed sales and repossessions continues to mount.”
However, she says, there is an alternative, as proposed by Alex Perriello, president and CEO of Realogy, the parent company of Sotheby’s International Realty, in a recent New York Times op-ed article.
Quoting Perriello, Geffen says that rather than being at odds with defaulting homeowners, lenders should consider partnering with them in long-term equity-sharing arrangements.
“In his article, Alex explains how this would work in the case of a homeowner who purchased a house in 2004 for $300 000 and has since seen it drop in value by 50% to $150 000.
“In an equity-sharing arrangement, the lender would write a new loan for $150 000, retire the original $300 000 loan and, to make up for that loss, take a 50% deeded ownership interest in the property. The homeowner would also agree to split 50% of the net proceeds of any future sale of the property with the lender.
“The new arrangement would also include a buyout provision, so that if the homeowner ever wanted to take over the lender’s share, he would simply pay the lender a predetermined amount of cash.”
She says such a plan would be relatively easy to put in place, and would be a boon for everyone involved. “Homeowners could stay in their homes and preserve their credit (assuming they keep up repayments on the new loan). The neighbourhood would avoid repossessions, which depress property values. And the lender can participate in the upside potential when the house eventually sells.
“Consequently, we believe it is really worth consideration by SA’s big lenders.”
SOTHEBY’S INTERNATIONAL REALTY