Mortgage Crisis Puts Friendships to the Test

A friend in need is a friend indeed. And friendships across America are being tested during this housing crisis. There is a way some friends are helping those facing foreclosure. They are using their self-directed IRAs to buy those homes from the bank and then leasing them back to their friends until they can get on their feet and afford a new mortgage.

It is not without risks, but, surprisingly, very few of the loans have turned out to be mistakes.

"The biggest risk is that you could lose friendships," says Hugh Bromma, founder of Entrust, which helps people use their self-directed IRAs to invest in everything from mortgages to race horses. As long as the entire transaction happens within the IRA, Bromma says, there are no tax implications until you retire.

You cannot do this for a family member, or at least for immediate family, because that could be seen as "self-dealing," in other words, a way for you to help yourself out of a bad spot without paying the penalities and taxes of withdrawing your IRA money early.

Ron Kuhlman is a franchising expert in Michigan who had a friend who lost his job three years ago this Christmas, and then lost his house.

"He got wrapped around the axle pretty bad financially," Kuhlman says. "He and his wife and kids, three years ago they were going to be evicted out into the snow."

So Kuhlman and his wife decided to help. They took $150,000 from their IRA and rolled it over into a trust with the help of a company called Guidant Financial. With that money, they bought the house back from the bank and leased it to the friend for $1,500. Out of that money, Kuhlman set aside $250 a month to go towards a down payment which the friend could use whenever he once again qualified for a mortgage.

"The risk to us was primarily that we had a friendship with this individual, and in order to do this kind of program the IRS requires us to basically treat this as an arm's length transaction, which meant that in the event my friend wasn't able to make his payments, we would be required to evict him just as a bank would."

Fortunately, that hasn't happened. Kuhlman says his friend has made timely payments and built up $9,000 toward a down payment. He's hoping to qualify for a mortgage later this year.

The best part? Kuhlman says he's gotten a return of 11 percent to 12 percent a year over the three years he's been leasing the home back. He says he's made more money this way than he had been back when his IRA was in mutual funds. Kuhlman says he spent about $4,000 setting up the transaction, and another $500 hiring a lawyer to make sure everything was legal.

He says he might not do it again, only because he's 61 years old and closer to retirement. But he has no regrets. "It's a good return, it's a fair return, and it's ultimately going to have a happy ending. I'm certain of that."

© 2009 CNBC.com