: Instead of Schummer borrowing money against the current value of the house, Point offered to pay Schummer a lump sum of cash in exchange for a share of his home’s future appreciation. In essence, the company was betting that the price of his house would keep climbing, and it wanted to get in on the action. These kinds of deals, often referred to as home-equity-sharing agreements or home-equity investments, have existed on the fringes of housing finance for decades. But Point is one of a handful of relatively young companies, backed by some of the world’s biggest investors, that are hoping to take the products mainstream. (View Highlight)
Though home-equity investments remain niche, the emerging industry is raising some concerns. Consumer advocates and financial advisors I spoke with worried that homeowners might not fully grasp what they’re getting into or lack the financial acumen to decide whether the deal is right for them. The contracts are structured so that investors are heavily favored to make a profit, regardless of the twists and turns in the market. Laurie Goodman, a fellow at the nonpartisan think tank Urban Institute, told me home-equity investments represented “a great deal for the investor.”
“If it’s a good deal for the investor,” Goodman added, “it may well be a bad deal for the borrower.” (View Highlight)
In their pitches to homeowners, companies like Point emphasize that their offers are not loans — the owner technically isn’t taking on more debt. Instead, they settle up sometime in the future, as much as 10 or even 30 years down the line. To come up with the cash, the owner can sell, refinance, or borrow more money to pay out the investor. If the home’s value has gone up, everyone wins; sell it for a loss, and the investor might share in that downside. It’s framed as a partnership, not a transaction. (View Highlight)
Here’s how it works: When he decided to cut a deal with Point, Schummer had 122,000lefttopayonhismortgage.Anappraiservaluedhishomeat275,000, but for Point’s purposes, his house was worth only 231,000—thecompanyapplieda1660,000, plus 65% of any appreciation on his home’s value. Schummer gets quarterly estimates from Point on what that amount would be — with his home’s value now estimated at 295,900,he′dowealittlemorethan80,000. (Point caps its returns so that the annual percentage rate of the deal doesn’t exceed 17%.) The deal will technically last for 30 years, but Schummer can choose to end it at any point by paying out the company. If a customer like Schummer refuses to settle up at the end of the contract, the companies have the right to force a sale of the home. But executives I spoke with stressed that they’d take such drastic action only after they’d exhausted all other options. (View Highlight)
As of now, these deals mostly appeal to those who don’t qualify for traditional loans or are saddled with other high-interest debt. But for companies such as Point, the explosion of home equity over the past few years represents a massive opportunity. (View Highlight)
In the past decade, Point and its competitors — Hometap, Unlock, Unison, EquiFi, and Splitero, among others — have made big strides toward broader acceptance. Larger investment groups such as Bain Capital, Palisades Group, and Redwood Trust have piled in to either invest in the companies themselves or buy up their home-equity contracts. Hometap recently announced that it had made 1billioninhome−equityinvestments,theequivalentofmorethan10,000contracts,sinceitsfoundingin2017;morethan730 million of that was deployed in just the past couple of years. Jim Riccitelli, the CEO of Unlock, told me he believed the industry could eventually grow to “trillions of dollars” in size once more people realized this kind of financing is available. (View Highlight)
To keep growing, these companies need to convince both regular homeowners and major investors that they offer a superior alternative to traditional home-equity loans — a true win-win, not just an option of last resort. (View Highlight)
Adam Rust, the director of financial services for the Consumer Federation of America, was skeptical in 2017 when he first heard of home-equity-sharing agreements. Home-equity gains seemed like the one area of household assets “that had not yet been tapped by venture capitalists,” Rust told me recently. That appeared to be changing as investors began circling homeowners’ nest eggs. Rust wasn’t just concerned about homeowners promising away a chunk of their future equity, which, especially for low-income families, represents one of the biggest portions of household wealth in the US. He was also troubled by the complexity of the product and how difficult it might be for an average consumer to calculate just how much they could be giving up. Rust played around with various scenarios in a spreadsheet, acknowledging that his comparisons required whipping out the kinds of obscure calculations you’d pick up in business school — net present value, internal rate of return, etc. (View Highlight)
Rust also worries about the lack of a standard product. Point offers one flavor of home-equity investments: Its contracts come due in 30 years, and the company invests in future appreciation — if the value of the home goes from 200,000to400,000, then Point just gets a chunk of the 200,000increase,plustheoriginalcashamountitgavetothehomeowner.Othercompanies,suchasUnlock,offercontractsupto10yearsandadifferentstructureinwhichtheysimplygetashareofthe∗total∗valueofthehome.Inotherwords,they′llgiveyouapercentageofyourhome′svaluetoday,incash,inexchangeforabiggerpercentagesometimeinthefuture.Say,forinstance,youownahomeworth1 million, and you want to take out 100,000.Unlockcouldgiveyouthat100,000 for a 20% stake in your home. In 10 years, the home’s value has grown to 1.2million.ThepaymenttoUnlockwouldbe240,000, or 20% of that ending value. (View Highlight)
. Companies offer different timelines, and while the basic formula is roughly the same — cash today for a stake in your home tomorrow — the variations could have consequences for how much you eventually end up paying. Do you go with the company that offers a 10-year timeline or a 30-year one? Do you make a deal based on your home’s total value in the future, or how much it’ll appreciate? (View Highlight)
Riccitelli and other executives in the space argued their offerings weren’t necessarily more complicated than, say, a home-equity line of credit, which includes payments that can change over time based on how much money you borrow and how interest rates fluctuate.
“I don’t think the product is more difficult. I think it’s different,” Riccitelli said. “Almost all financial products have some level of complexity to them. Look at the regular, old mortgage loan, just a 30-year fixed loan. Does the average customer understand how loan amortization is calculated?” (View Highlight)
“It’s a great marketing piece to say, ‘This isn’t a loan — you’re not making any monthly payments.’ It’s a really attractive sell,” Jordan Gilberti, a senior lead planner at the investment-advisory company Facet, told me. “But on the other hand, there is a cost to it. There’s a cost to every type of product like this.” (View Highlight)
This may sound like semantics, but the distinction between a loan and equity investment affects how the product is regulated. Mortgage loans require a different licensing process, as well as much-stricter disclosures and protections for consumers. So far, federal courts have upheld these deals as options contracts, not loans. But some states, including Connecticut and Maryland, have already amended their statutes so that home-equity investments are regulated like mortgage loans, meaning more guardrails for homeowners (View Highlight)
“There’s a lot of events along the way that real people have,” Matthews said. “The alternative, which could be catastrophic for that homeowner, may be taking on debt that they can’t manage or having to sell a home that they don’t want to sell.” (View Highlight)
It’s possible that a home-equity investment will work out to be more expensive than if you’d just borrowed the money, Jeffrey Glass, the CEO and cofounder of Hometap, said. But customers are also ascribing real value to the flexibility of that cash, Glass added — there’s no lender demanding payment each month, and homeowners can use that money to do all kinds of other things in the meantime. (View Highlight)
“What they’re saying is, ‘OK, I know my house will probably go up in value and the cost of this HEI will probably be more than if I had borrowed,’” Glass told me. “But I get all this other benefit in between now and then, and it’s worthwhile to me.” (View Highlight)
A lot of the people I’ve talked to believe home-equity investments are destined to remain a niche product, something that appeals only to homeowners who find themselves in a bind and don’t have other good options. But others are placing massive bets that these deals will find a broader audience. If home-equity investments do take off, their rise will add to the wider reckoning over who gets to benefit from rising home prices — regular homeowners or the cash-flush investors who are best positioned to bet on the market. (View Highlight)