B5-5.1-03, Community Seconds: Shared Appreciation Transactions (11/01/2023)

The shared appreciation loan and any share in appreciation must only be payable in connection with one or more of the following events as specified in the shared appreciation program's legal documentation:

• a specific date, which must not be earlier than the scheduled maturity date of the first mortgage granted in connection with the purchase of the property;
• repayment in full of the first mortgage (except when the shared appreciation loan is being resubordinated in connection with a refinance;
• acceleration of the first mortgage in accordance with its terms (for purchase mortgages only, this is limited to acceleration after the conclusion of loss mitigation or other measures to cure a delinquency); or
• an unauthorized transfer, or unauthorized change in occupancy status, of the property, or an event of default relating to the failure to maintain collateral (after notice and an opportunity to cure). 

In addition, the program's legal documents must allow the borrower an option to prepay the loan in its entirety at any time and to pay all other amounts due to the provider, including any shared appreciation.

If the shared appreciation loan becomes due and payable, all amounts then due and payable to the first mortgagee must be paid first, followed by other entitled parties, such as the shared appreciation provider and the borrower.

In the program's legal documentation, the appreciation in value must be based on one of the following:

• When the property is sold on the open market, the appreciation must be based on the actual sales price of the property.
• In any other instance, the appreciation must be based on an appraisal from a state-licensed or state-certified appraiser obtained in accordance with the program's terms, or if explicitly indicated as permitted in the program's legal documents, a current value established by a third-party, commercial automated valuation model (AVM).

For limited cash-out refinances, appreciation in value may be based on any method included in the program's legal documentation.

Except as permitted below, the provider's share of appreciation must not exceed the "Standard Percentage" which is derived by dividing the original shared appreciation loan amount by the original sales price.

For example, if the provider contributed a 10% down payment towards the purchase of a home, the provider cannot share in appreciation greater than 10% (the Standard Percentage) when the home is sold.

Exceptions

The provider's share of appreciation may be greater than the Standard Percentage in either of the two scenarios below:

1. The borrower must first recover the following (which will result in a reduction in the amount of appreciation) before the provider is able to share in appreciation:

• any portion of the down payment that came from the borrower's own funds,
• reasonable costs of selling the property (such as a sales commission),
• the costs of any improvements made by the borrower to the property (provided they were allowed under the program's legal documentation and not otherwise taken into account in determining the amount of appreciation), and
• the principal portion of all payments the borrower made on the first mortgage.

2. The provider may share in appreciation greater than the Standard Percentage if

• in the first year following origination of the shared appreciation loan, the share does not initially exceed 75%, or
• after the first year following origination of the shared appreciation loan, the share is reduced at least proportionally each year, so the share is equal to or less than the Standard Percentage no later than five years following origination of the shared appreciation loan.

For example, if the provider's share of appreciation is 70% in the first year, and the Standard Percentage is 10%, then the provider's share must decrease by at least 15% annually (70% minus 10%, divided by 4), so that in the second, third, and fourth years, the provider's share of appreciation must not exceed 55%, 40%, and 25%, respectively.