Shared Appreciation Modifications (SAM)
In order to understand a shared appreciation modification you first must understand home equity. A simple definition of equity in a home is the market value of a homeowner's unencumbered interest in their real property. In other words, the difference between what you own and the true value of your home. So if I bought a home for $100,000 and put twenty percent down ($20,000), assuming the value of the home was actually $100,000, I have $20,000 in equity right off the bat. Now as time passes and I make my monthly mortgage payments, assuming the worst does not happen and my home looses value I will gain a small amount of equity each month as I pay down my principal balance. Unfortunately things do not always go as planned and sometimes the market takes a substantial hit and my home looses value, so the home I purchased two years ago for $100,000 could now actually be worth $50,000, meaning I have negative equity in the home, or my home is underwater.
With the dive in home prices due to the hit to the economy some lenders are focusing their efforts in a way to bring equity back to struggling homeowners. One approach is the shared appreciation modification or more commonly called SAM. This form of modification is really more of a bet on the future for the lender, the idea is that eventually the economy with pick up and home prices will once again be profitable. The shared appreciation modification creates a symbiotic and profitable relationship between all those involved.
On the surface seems like a great deal and truly it is, essentially they are waiving principal balance and leaving you with newly restored equity in your home again. The amount of money forgiven can be quite substantial. The SAM will lower the principle balance on your home to 95% of the current fair market value, for this the lender has the right to share precisely 25% of the equity you build over the life of the loan, of course never the exceed the amount they forebear. The forbearance will happen in 3 consecutive waives each happening on the anniversary of your approval each equaling approximately 1/3 of the agreed upon amount. These waivers are contingent on the fact that the homeowner must not fall behind more than 90 days during the first three years, if the homeowner does fall more than ninety days delinquent the forbearance stops and the amount that was forgiven becomes a balloon loan that would be due at the maturity of their loan or in the event of a sale regardless of the amount of equity built up in the home.
This creates a win-win for the lender, well as long as the world doesn't come to a halt, ideally in 30 years your home will have all kinds of equity and everyone walks away happy. If however you do not want to sell the home at the maturity of your loan, you will need to take out a loan or pay a large lump sum to at most pay off the amount of money that your lender let slide during these troubling times.
SAMs work just like the balloon loans we talked about previously. They are non interest bearing loan that will assist in troubling times to bring down the monthly price of your home, of course when selling you need to keep this in mind. This is not free money and eventually needs to paid back either through the equity you have in your home or through refinancing, assuming of course that you built equity in your home over time. If you continue to keep your mortgage current and for some reason you didn't build any equity over the life of the loan (which is highly unlikely) you will not owe a dime at the maturity of your loan.
The key is that you keep you mortgage payments current if for any reason you fall more than ninety day delinquent during those first three years following the modification the agreement is null and void and any amount that was “forgiven” previously, needs to be paid back and any future amount that was meant to be forgiven now is added back into the principal balance of your loan. These modifications are easier for both the investor and the lender to stomach, because eventually there is a good chance they will see a positive return on their investment. It works out well for a homeowner that is facing hard times with their home underwater as well because it creates a chance to build instant equity in the home, I see this program as a win-win for everyone involved.
At the maturity or pay-off of your lend you only need to pay back 25% of the equity in your home or the amount that was forgiven during the modification whichever is less, the lender can never take more than the amount that they agreed to forbear. So even if at the maturity of your loan you only build $10,000 in equity, and the lender agreed to forbear $30,000 during the shared appreciation modification they would only be entitled to $2,500 assuming that you kept up you end of the deal and stuck to the terms of your modification agreement. Now I understand that it is extremely unlikely that you would only build $10,000 in equity over a 30 year mortgage but this gives you a general idea of how the shared appreciation modification works. It is always important to thoroughly read and understand your modification agreements. If you are having difficulty understanding the legal terms of the agreement make sure you are reaching out and asking the hard questions to someone who is able to help, there are HUD counselors available for just this thing for free if you cannot afford an attorney, at HUD.gov. Never sign an agreement that you do not understand or have no read through, it may place you in a more precarious situation down the road.
SAMs are primarily built to restore pride for the homeowner and once again give them equity in a home that was once in danger of abandonment, as well a shared appreciation modification can also lower the interest rate of your current loan and will look to change any adjustable rate mortgage into a fully amortizing fixed rate modification. I feel it is pertinent once again to mention that modifications are present to help homeowners currently struggling with a long term hardship, if you are current on your monthly payments and not facing a hardship that will not place you in imminent danger of default it would be more beneficial to look at refinancing your home loan before wasting countless hours filling out paperwork for a modification that will more than likely never happen. If you have any questions on this article or any other that I have written thus far please feel free to email me at firstname.lastname@example.org I will try to respond as quickly as possible and give you the best advice possible or direct you to the closest resources in your area to get your questions answered,
Keep in mind that your lender may not participate in the shared appreciation modification, but if they do make sure that you adhere to all the standards set forth so you are able to reap the full benefits of the program. As of late, these modifications have become more and more popular due to the growing concern of foreclosures and the funds being lost each day, more than not a foreclosure is not a good thing for the lender or the borrower. If it can be avoided rest assured your lender wants to research every avenue available to try to assist and avoid a potential foreclosure sale.