Shared appreciation mortgages, a once obscure mortgage product, can stem the rising tide of foreclosures and bank failures.

In SAMs, the lender takes a portion of future home appreciation in return for an interest rate cut – say 50 percent of future appreciation in return for a 2 point rate reduction

For the homeowner, keeping half the home appreciation is better than no home at all. And for the lender, less interest beats no interest at all.

Lenders can use the tool to avoid loan write-downs by converting part of the loan principal into equity that is listed on its balance sheet.

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Lenders can also take an equity stake in return for slashing loan amounts of distressed borrowers, a mutually beneficial strategy to top Fed officials are urging.

"The fact that many troubled borrowers have little or no equity suggests that greater use of principal write-downs or short payoffs, perhaps with shared appreciation features, would be in the best interest of both borrowers and lenders,” Fed Chairman Ben Bernanke said at a recent banking conference.

"Approaches like this, and other worthy ideas that are being proposed, should be debated by policymakers and interested parties – but without delay,” agreed Boston Fed President Eric Rosengren, speaking to business leaders in Massachusetts.

Shared appreciation dates back to the 1980s when sky-high interest rates prompted a scramble for innovative solutions. But although common in the UK, SAMs never got off the ground in this country. Rates dropped and nobody bothered with them when hybrid adjustable-rate mortgages offered lower rates. Plus, homeowners weren’t interested in sharing equity in a booming real estate market.

But now ARMs are out of favor, and SAMs are getting another look. They could be especially attractive where home prices are plummeting, and could open the housing market to more first-time homebuyers now shut out by tight lending standards, which could help overall real estate values.

Shared appreciation could also be used for second mortgages. "The second mortgages could then provide enough of a cushion so that other lenders would provide standard refinancing for the rest of the mortgage,” argued Edward L. Glaeser, a Harvard economics professor, in a Boston Globe article.

Of course there are drawbacks and shared appreciation isn’t for everyone. Those in still-appreciating markets could lose out.

Homeowners pay lenders their equity cut when they sell or refinance, but those keeping the SAM through its term must either get a new mortgage or come up with a large lump sum in the neighborhood of $20,000 or $50,000.

So in a nutshell , weigh the upsides and downsides of SAMs when deciding whether to use this tool.

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