Practical Distributism: The Home Mortgage
We have had several articles and comments regarding usury, mainly focusing on what usury is and why distributists oppose it. Considering the prevalence of usurious practices in our current economy, can we even envision how our banking and credit system would work without it? We must candidly admit that loans (and I use the term because of it familiarity rather than its accuracy) would come to a screeching halt if those institutions providing it cannot make a living by doing so.
In the case of providing loans for the purchase of productive property, an interest in company earnings could conceivably replace the current practice of charging interest on the money provided. It would be a major shift, but the prospect is not inconceivable. However, there is another aspect that literally strikes close to home; in fact, it involves the home itself. Considering that home mortgages are a large part of our financial world, and that this is the largest expense for the average family that manages to buy a home, how could we apply Distributism to a large loan for non-productive property like a home?
The Swedish JAK Medlemsbank developed a plan where members earn points toward interest-free loans. The points are based on savings deposited over time. It makes its profit by using the money members have in savings for loans on interest while the members build up their points. This arrangement encourages members to keep money in JAK Medlemsbank, where it can be put to work in the economy through loans. By making the profitable loans in a non-usurious way, distributists should be able to accept this type of arrangement.
One drawback to this, however, is that it could take a very long time before enough points were earned for a major purchase like a home. Therefore, this article will offer another alternative form of home mortgage that is both interest free and profitable.
Since a home mortgage is a credit for non-productive property, there is no projected income in which the mortgage provider can claim an interest. He will need some security to back his interest in the credit provided, otherwise his risk would be too high and he would have no incentive to offer the credit. Since the average home buyer doesn’t have enough capital to secure such a large amount, the property being bought is the most reasonable security to back the investment. This is already accepted in home loans today and is applied in the form of a lien.
Keep in mind as you read this proposal that there are other possibilities. What I present is certainly open to revision to fit particular circumstances. I would recommend an agreement of joint ownership where the buyer is on a schedule to buy out the mortgage provider’s percentage. This would be somewhat similar to the current “rent to own” plans. There are pros and cons to any arrangement, but they can still be made so that both parties are equally protected (and equally at risk). I am not a lawyer, but I think the following terms could be written in a way that reasonably protects both sides.
1: The buyer and mortgage provider are joint owners of the property with all of the rights that pertain to ownership. The obvious problem with this is that the buyer wants the benefits of home ownership. I suggest that the terms of the agreement has the buyer paying the mortgage provider for exclusive use of the latter’s ownership rights on a monthly basis. This includes nearly all rights to the property, like mineral rights, to the land. This arrangement prevents the mortgage provider from interfering with the buyer’s use of the property, but compensates him for not being able to make use of property in which he has a share of ownership.
2: The amount the buyer would need to pay for exclusive use would be based on the mortgage providers ownership (principal). In my opinion, one half of one percent (0.5%) of the principal per month would be adequate. If the purchase price was $200,000 and the buyer provided $5,000, the mortgage provider would start out owning $195,000. The exclusive use payment would be $975 for the first month of the partnership. As the mortgage provider’s ownership decreases, so does the amount the buyer has to pay for exclusive use.
3: The amount the buyer has to pay toward full ownership ownership is determined by the term of the loan in years and the amount the mortgage provider paid for the purchase. If the term is for fifteen years, the buyer has to pay one-fifteenth of the mortgage provider’s initial investment per year. If the term is thirty years, he would be required to pay one-thirtieth per year. In the example from number 2 above, the mortgage provider paid $195,000 of the purchase price. A fifteen year agreement would require the buyer to buy $13,000 of the mortgage provider’s ownership per year. A thirty year agreement would require the buyer to buy $6,500 per year. These amounts are the buyer’s increase in equity per year.
4: The buyer can pay the balance of the mortgage provider’s investment at any time, bringing the contract to an end and transferring exclusive title to the property to the buyer. There can be no penalties for early payment because the mortgage provider will have his full investment returned and will have the money available for further profitable investment.
5: There would be no requirement for monthly minimum payments beyond the payment for exclusive use. Throughout the year, the buyer is free to pay whatever he can afford against the principle, provided that he pays at least the required portion of the loan per year. A monthly payment schedule against the principal could still be provided, but there are no penalties for not following it. Throughout the year, the buyer is free to pay whatever he can afford against the principal, as long as he makes the required amount by the end of the year.If he paid more than what is due in a year, the excess amount would be applied toward what would be due in the following years.
Here is a comparison of the two terms presented so far, fifteen and thirty years. For the fifteen year term, the first month’s payment would be $2,058.33 ($1,083.33 for the principal and $975 for exclusive use). For month 60—one third of the way through the term—the payment would be $1,738.75 ($1,083.33 for the principal and $655.42 for exclusive use). At this point the buyer’s ownership (equity) has reached $70,000, 35% of the purchase value. The final scheduled payment (month 180) would be $1,088.75 ($1083.33 for the principal and $5.42 for exclusive use). For the thirty year term, the first month’s payment would be $1,516.67 ($541.67 for the principal and $975 for exclusive use). For month 120—again, one third of the way through the term—the payment would be $1,194.38 ($541.67 for the principal and $652.71 for exclusive use). Once again, the buyer’s equity has reached $70,000. Compare that to the standard interest based mortgage agreement. The scheduled final payment [month 360] would be $544.38 ($541.67 for the principal and $2.71 for exclusive use).
How does the mortgage provider fare in this arrangement? For the fifteen year term, he would get $88,237.50 in exclusive use fees. For the thirty year term, he would get $175,987.50. This ends up being comparable to a fixed interest loan at around 5.5%, but the buyer’s equity increases at a constant rate instead of very slowly in the beginning of the term and very quickly toward the end.
6: There are no interest charges except as follows. In the event that the buyer has not paid the required amount due at the end of each year, he will pay a monthly interest of 0.5% on the remaining balance of what was due until it is paid. This is not usury because the basic terms of the agreement are interest-free. The mortgage provider has invested in the property for the buyer’s benefit (eventual exclusive ownership). In doing so, he has forgone the opportunity to use that money for other potentially profitable purposes according to the payment schedule. The agreement is that he will get back an agreed portion of his original investment per year. If the buyer fails to pay this amount, the mortgage provider is unjustly deprived of the use of that money, and can charge interest to counter that loss until it is recovered. There could also be interest charges against any late payments for exclusive use on the same basis.
7: Spouses are automatically participants of the contract, even if the marriage takes place after it is enacted. The terms are inheritable to their children if the couple should die before the end of the term.
8: If the buyer stops making payments for a period of time to be determined by the contract, the mortgage provider has the following options:
8a: He can forgive part or all of the money due for either the repayment or the payments due for exclusive use. If he only forgives a portion of the repayment, the remaining terms of the contract remain the same. Forgiving a portion of the repayment due means transferring to the buyer that portion of ownership without payment. Forgiving the balance of the repayment grants the buyer full ownership of the property without any further payment.
8b: He can choose to grant the buyer more time, provided that there is no additional charge beyond the terms laid out above for doing so. This would effectively be the same as forgiving the buyer for any interest due for not paying the required amount due by the end of the year.
8c: He can pay for the buyer’s percentage of ownership, based on the original purchase price, and take full ownership of the property.
8d: He can force the sale of the property. The money from the sale is divided according to the percentage of ownership.
Unlike foreclosure terms, there is no way the buyer loses the house and ends up empty handed. In option 8c he is paid back his percentage of ownership—that is all of the money he has paid for the property (not for exclusive use). In option 8d he is paid his percentage of the sale price. This could be less than his investment to date if the house sells for less than the original purchase price, or it could be more if it sells for more. In this, the buyer and the mortgage provider share a proportional risk. The money paid for exclusive use is not counted because that is money charged for a service provided. While the agreement was active, the mortgage provider lost his use of the property and the exclusive use fee was his compensation for that loss. Additionally, any outstanding exclusive use payments or interest for late payments would be deducted from the buyer’s portion on the same basis.
9: This agreement is between the buyer and the mortgage provider. Since both parties are owners of the property, neither one can sell his portion and thereby transfer his portion of the agreement to a third party. Neither party can enter into an outside agreement that grants a third party any claim to the property without the consent of the other party and the appropriate amendments to the original agreement.
I am not claiming that this is a perfect arrangement, but it could certainly serve as the starting point for establishing an interest-free and non-usurious method of financing the purchase of a home, or practically any other non-productive purchase, while keeping it a worthwhile business endeavor for the mortgage or credit provider.
