Provider’s Share in Appreciation in Value
The repayment terms of the Community Seconds mortgage may provide for the provider to share in any appreciation in the value of the security property in lieu of charging interest.
If the Community Seconds mortgage provides for both a stated interest rate and a sharing in the property appreciation, the first mortgage cannot be sold to Fannie Mae unless the provider chooses only one of the options.
The appreciation in value must be based on:
- the actual sales price of a property that is sold on the open market,
- the appraised value of the property, or
- the amount of a successful bid at a foreclosure sale.
When the property is subsequently sold (or foreclosed), the sales price or value determination should be paid, first, to the first mortgagee in an amount required to pay off the first mortgage in full, and only then, to other entitled parties, such as the Community Seconds provider and the borrower.
The provider’s share of the equity generally may not exceed the percentage derived by dividing the original principal amount of the Community Seconds mortgage by the original value of the property.
However, the provider’s share in the appreciation can be greater than this calculated percentage in two instances:
- As long as the Community Seconds program gives the borrower the right to recover all of the following before the provider is able to share in the 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 to the property (as long as they were allowed under the program guidelines),
- the principal portion of all payments the borrower made on the first mortgage.
- As long as the provider’s share does not initially exceed 75% and is reduced over time so that the percentage of the appreciation will be equal to or less than the percentage usually allowed by no later than five years after the date the Community Seconds mortgage was originated.
For additional information, see B5-5.1-02, Community Seconds Loan Eligibility.