It seems everyone is talking about the Sub-Prime Mortgage Market. Mark Cuban just posted an interesting proposal on his blog. He says:
Why can’t home owners sell some percentage of equity in their homes on a listed exchange ? Why can’t I “Take My House Public ?” Why not create a market or exchange where homeowners can sell equity in their homes?
The rules could be very simple
- The house is appraised by a company approved by the exchange that lists the houses.
- “Shares” are set with a Par Value of 10pct of the appraised value. For a 100k dollar house, there are 10 shares potentially available. However at no point in time can more than 40pct of the “shares” in a home be sold. We dont want the opportunity for “hostile takeovers”
- The price of the shares will of course be set by the market. In a hot market it will be set above par, in a tough market like today, it will sell below Par.
- All Proceeds from the sale of shares MUST be used to pay down any debt on the home.
This is the key element of this approach. By selling equity in a home, the buyer gets an asset based security that will move up and down with the market. If this market is big enough, there should be enough liquidity to move in and out of positions.
The seller receives cash that can be used to pay down the debt and thereby reduce his/her monthly payments. The seller loses a part of the upside if the market for the home improves and prices go up, but thats a small price to pay for not going into foreclosure.
BusinessWeek described a similar solution back in May with a company named REX & Co. Inc.
Example: You buy a house for $500,000 and cut a deal for REX to give you $100,000 in cash in exchange for half of the change in value of the house. Ten years later you sell the house for $700,000. You give REX back the $100,000 you initially received, plus half of the increase in value, which amounts to another $100,000.
If the house went down in value to only $400,000, you would still have to pay REX the $100,000 you got up front. But REX would absorb half the $100,000 loss in value by paying you $50,000. So your net payment to REX would be only $50,000 ($100,000 minus $50,000).
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