The state of California and the federal government are experimenting with a plan to help moderate-income families buy homes by selling what amounts to shares of stock in their properties.
Those who buy the shares contribute part of the down payment, make part of the monthly mortgage payments -- and then reap a portion of any profits if the owner moves and the home is sold.
Instead of the traditional fixed rate of return, the investor -- private or government -- would share in the equity of the property and gamble that the price of the house would increase enough to provide a decent return on investment when it is sold.
The concept is called "shared equity" -- a financing concept already being experimented with by a few private investors on the West Coast and now the center of a government experiment that could serve as a national model.
The California program is financed by a $7.5 million appropriation from the state legislature and supplemented by $200,000 grant from the Department of Housing and Urban Development. Under the program, families displaced by condominium or cooperative apartment conversion or the sale of mobile home parks whose incomes are equal to or under median county income would be eligible.
If the program works well in California, it might be used in other areas of the country, including the Washington area, said Gloria Cousar of HUD.
The state would provide funds to cover part of the costs of the home buyer's first trust in exchange for an equity share in the dwelling.
For instance, if a family could make a $10,000 down payment and qualify for a $20,000 mortgage but could find only a $50,000 house, the state would commit to buy back half of the $40,000 mortgage the family would need.
In other words, the lender would lend $40,000 but $20,000 in state funds would be used to pay the lender for half the mortgage. The home buyer would make monthly payments on $20,000, with the state deferring any return on its 40 percent investment in the house until it was sold. Then the state would collect 40 percent of the profit on the house -- presumably enough to cover its costs and more.
Regulations for the program will be worked out this summer.
Policymakers are looking at shared equity as one method to help close the so-called affordability gap in housing -- the difference between the rates at which housing costs and incomes have risen.
For instance, in California in the last decade housing prices have risen nearly twice as fast as income, sharply limiting the number of families who can qualify to buy houses. Rapidly rising real estate prices elsewhere, including in the Washington metropolitan area, have had the same effect.
Government agencies and private lenders have experimented with a variety of ways to make housing more affordable, including reducing the percentage of purchase price required for a down payment and lengthening the terms of mortgages to cut monthly payments.
"If you've gone as far as you can, what else can you do to make housing affordable short of a direct subsidy?" said I. Donald Terner, director of California's Department of Housing and Community Development, which devised the shared-equity experiment.
"Young families and many others have been finding equity partners informally," he said. What the state is trying to do is institutionalize a solution already devised by families who share houses or who borrow from inlaws or relatives at no interest in exchange for an equity share he said.
Families participating in the program would be compensated for any improvements made in the properties and would be able to buy the state's share later at rates set through appraisal.
If the state made money beyond its costs, the money would go into a revolving fund to continue the program.
The California experiment appears to be the largest foray into shared equity so far, but individual entrepreneurs and at least one real estate firm in California also are experimenting with the notion.
"Our whole concept is getting people into houses, making houses affordable again," said Jerry Hunt, a general partner in California Housing Properties. Investors put their money into a limited partnership fund that helps to finance housing purchase.
Within five years the home buyer has to repay, sell or refinance the house so the partnership can get its money out of the investment.