The Mortgage Professor: Allying homebuyers, investors could be tricky
—Disclosures to investors: To diversify its risk among many individual transactions, investors cannot afford to investigate each deal themselves. Primarq must provide them with ready access to the information they need. The Internet provides wonderful tools for this purpose. It enables Primarq to engage a number of third-party vendors of the types of information that investors in homes will want, including investment returns under different assumptions regarding appreciation rates and transaction life.
—Providing assurance that investors get paid: Mortgages are recorded as a protection for lenders. The borrower can’t sell and skip town with the proceeds, because the lien must be paid before the sale can be executed. A third-party investor requires the same protection, which means that their interest in the property must be recorded. It is recorded as an ownership rather than a creditor interest, but the result is the same. The property cannot be sold without their participation.
Since it is not practical for every individual investor to be involved in the sale of a property, Primarq will record its ownership through a trust, which will be a proxy for the investors. I doubt that there are any legal barriers to doing this, but I am not a lawyer.
Some of the issues raised above are obviously more challenging than others. I toast the effort, which will be helpful to all parties if it works as intended.
ABOUT THE WRITER:
Jack Guttentag is professor emeritus of finance at the Wharton School of the University of Pennsylvania. Comments and questions can be left at http://www.mtgprofessor.com.
©2013 Jack Guttentag
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