Theeeeeey're back….

You’ve certainly got to give the financial guys credit for being persistent and creative. With many of their traditional mortgage products in the pooper, they’ve come with a new product, frequently called a shared-appreciation arrangement or equity release. This product is being primarily pitched to older homeowners as a way to get some equity out of their homes for whatever purposes that they need the money.

The way this product works is that the homeowner gets money now, based upon the value of his/her home and on the promise (and commitment) to share some (often 1/2 ) of the future appreciation on the home. The loan comes due upon sale or when the homeowner decides to terminate it and pay back the lender. Generally the loans are written for 5 years, sort of like a balloon-payment mortgage with the lender not liable for any losses during the first three years. So the lender can’t lose during that time frame.

If the home appreciates and the owner decides to sell in 5 years, then ½ of that appreciation, plus the initial loan amount are due. If it doesn’t appreciate, well you still owe the initial loan amount, but you can deduct ½ of the loss that you’ve incurred over that time, so you win. The likelihood that real estate prices are going to be less than they are now in five years is considered remote, but it could happen.

This sounds like a good deal right now, with values down and the end to the value slide not yet in site; however, this type of loan can end up costing a lot more than just a straight equity line of credit or even a reverse mortgage. For the full Wall Street Journal story on how this works and the risks involved, click here.

Now we all know what the next step in this storyline will be don’t we? Some slick operator will figure out a way to package up a bunch of these equity release loans and sell the packages as collateralized investment instruments to pools of investors. Sound familiar? Here we go again! Eventually some of these loans will prove to be bad bets and another round of bailing out the banks will become necessary. We haven't even got the current bailouts started and the financial guys are working on the next set of questionable products.

Honestly, these financial products guys have more chutzpa that a New York cab driver and apparently more lives than a cat. The only common element in all of their products is that they could and maybe should be sold under lottery licenses, since they are all bets on an unknown future. However, unlike a lottery, in which the odds can be calculated and shared with the “investor”, these clowns make these investment bets sound like business propositions and never share the odds (because they have no idea themselves).

So beware the friendly financial salesman with the new pitch about how you can unlock the money in your home. Do the home work. Read the article(s). Study the alternatives and try to figure out the odds. Maybe it will work for you; maybe not. Just remember that old saw about things that sound too good to be true.