Loan programs tap home equity, minus traditional interest payment
Editor's note: This is the first column in a two-part series that will conclude next Sunday in Homes Plus.
WASHINGTON - Improbable as it sounds at a time when American homeowners have lost billions in equity holdings, a new industry is taking shape to help them tap portions of their equity wealth without incurring traditional mortgage debt or making interest payments.
Three companies with sophisticated capital market backers - REX & Co., Equity Key and Grander Financial - are offering cash to owners who agree to cut them into some of the future appreciation growth of their properties.
The cash typically represents a fraction of the current market value of the home, and rises with the percentage of future appreciation the owner is willing to share.
For example, San Francisco-based REX offers $70,000 cash to the owner of a $900,000 house who is willing to share 30 percent of future appreciation. That rises to $117,000 in exchange for a 50 percent share. Existing equity in the home - and future value growth attributable to capital improvements - are not affected by the deal. There are no interest rates or monthly payments, and the timing of the end of the agreement usually is up to the property owner.
Unlike a reverse mortgage, where interest charges accrue and are added to the total debt that must eventually be repaid, all of REX's receivables are tied to the future growth - or decline - in the value of the real estate. If values go down, REX takes a loss equal to the percentage of the value change it shared in the agreement. If values remain flat, the homeowner repays the amount of the original cash extended by REX.
But if values grow steadily or even boom, the company's returns have the potential to soar. REX, which says it is now writing agreements in 13 states, is backed by American International Group, the world's largest insurance company, and the Royal Bank of Scotland's Connecticut-based Greenwich Capital Markets Inc. subsidiary.
Tjarko Leifer, REX managing director, says "we see ourselves at the beginning of a much larger industry" that is focused on providing products to efficiently tap the $9 trillion of net equity held by homeowners. Unlike reverse mortgages, which usually are restricted to seniors 62 or older and often entail significant fees, REX has no minimum age limit and relatively modest transaction fees. Participants must have a minimum 25 percent equity stake, however - their total mortgage debt cannot exceed 75 percent of the home's market value.
The company's typical clients, said Liefer, are "56-year-old baby boomers" with a 50 percent equity stake in their homes. They've built up equity over the years - even in the face of the housing market downturn - and "want to protect what they've already got." But they also "want to take some chips off the table" for investments, personal expenditures or to acquire additional property.
Competitor Equity Key offers similar cash payouts in exchange for shares of future appreciation, but has an age minimum of 65. Based in San Diego, Equity Key is a subsidiary of KBC Bank N.V., a $450 billion asset financial institution based in Belgium.
The third player in the market, Grander Financial, is headed by mortgage industry entrepreneur Anthony Hsieh, who founded and sold two major home loan companies, including LoansDirect.com, which became E-Trade Mortgage, and Home Loan Center Inc., which merged into LendingTree LLC. His goal with Grander, he says, is "to create a geographically diverse" portfolio of investments tied to equity movements on homes across the country that will deliver at least moderate average growth rates over the coming years, even if some regional markets go soft.
Under Grander's "My Equity Freedom" program, the owner of a $500,000 house can receive an immediate $71,429 lump-sum payment in exchange for agreeing to share 50 percent of future appreciation. The owners of a $1 million house could get $142,857 in cash upfront for sharing half of their future appreciation.
What's in the fine print of these cash-for-appreciation deals and why are they not for everybody? No. 1: All of the programs to date are highly targeted toward specific property types. For example, REX does not allow condos, duplexes, townhouses, rental real estate, tenants-in-common dwellings, or houses that are not single family, detached dwellings that are "typical" for their area.
Second: Although sponsors bend over backward to emphasize that these are not "mortgage debt," the fact is that they are real estate financings that give sponsors the legal right to a portion of an owner's future market value. At the extreme, owners who take the money but do not abide by the contract agreements can face legal remedies ranging all the way to foreclosure.
Next week: Pros and cons
• Write to Ken Harney at P.O. Box 15281, Chevy Chase, MD 20815 or via e-mail at kenharney@earthlink.net.
© 2008, Washington Post Writers Group