Housing Crowdfunding Co-ops brings together long-term savers with people who wish to live in a home they own. It is a sad fact that anyone who has a mortgage does not have the security of tenancy over the dwelling in which they live. If they fail to meet their mortgage repayments, the mortgage holder can force them to sell. The mortgage holder gets priority over the money from a property sale and typically, in cases of a forced sale, the homeowner loses some or all the equity for which they have paid.
A Housing Crowdfunding Co-op changes the relationship between lenders and borrowers by sharing the risk of default in mortgage payments across all members of the Co-op. The Co-op also shares the risk of the destruction of a dwelling and removes the need for insurance.
On the positive side, the lenders in a Co-op also share in the capital gains from the sale of the properties.
An even greater positive is that both lenders and borrowers share the benefit of the removal of interest payments and money inflation. Eliminating these costs typically more than halves the cost of purchasing a home. The Co-op members share these savings according to the rules they establish.
The following is a possible set of Co-op rules, but each Co-op determines its set of rules for its particular circumstance.
The Co-op has the title to the dwelling. It buys the dwelling and creates a mortgage. The buyer of the home buys the mortgage through regular repayments. The regular repayments are 5% annually of the value of the home at the time the buyer buys their first part of the mortgage. The payments increase with inflation. When the buyer owns all the mortgage on their property, they stop repayments. In this Co-op, the title of the property stays with the Co-op to make it easy for the buyer to sell a mortgage back to the Co-op. The 5% payment purchases 2/3 or 5% or 3.33% of the mortgage. The extra 1/3 goes to pay lenders for the use of the money and to pay for losses due to fire or damage. The proportion of 2/3 is set by the Co-op and depends on the expected life of the dwelling and the risks of physical losses.
Lenders purchase a share of all the mortgages the Co-op owns. When they want to get their money out of the Co-op, the Co-op sells their share of mortgages at the price they paid adjusted for inflation. While-ever they own mortgages their share of the mortgages increase by 8% of their initial purchase price adjusted for inflation.
What does this mean for Buyers?
Assuming a buyer purchases a $500K home with no deposit. They will pay $25,000 a year to purchase their mortgage and continue paying that for 30 years. Repairs and cost of changes to the property are paid for by extending the mortgage.
If they were able to get a 5% mortgage for 30 years, it would cost them $975K or $475K more than $500K to pay off the mortgage.
What does it mean for a Lender?
Assume the Lender buys $500K of mortgages and leaves them for ten years. They then decide to get their money back by selling their mortgages. After ten years they would have $500K + 8% * $500K * 10 = $900,000K. They could sell mortgages and obtain a return of capital of $67,500 for 20 years.
A person can be both the buyer of the particular property in which they live and a buyer of other mortgages. As mortgages are an attractive investment people who live in properties of the Co-op would get first preference on purchasing other Co-op mortgages.
How much does it cost to operate a Crowdfunding Co-op?
A 0.2% transaction fee on all money transfers would pay for the system operation.