The mortgage industry is reeling from the swift uptick in interest rates and the rapid decrease in refinance applications. The consensus is that a majority of homeowners have a first mortgage that is priced well below today’s rates, so the rate-and-term refi and streamline lending markets have evaporated.
Lenders and originators are scrambling for clients who want to pull cash from their homes. But they are running into significant objections due to the high cost of the refinance — and not just closing costs but the overall interest rate. The problem goes beyond rates, however, and is exacerbated by diminishing supply, conservative investors and an overheated economy with rampant inflation.
In the future, these products are likely to be available on the wholesale mortgage market to brokerages and specialized financial institutions.
The current market conditions pose a problem and a threat to the mortgage industry as a whole. One product, however, is poised to gain momentum and no one has seen it coming. The home equity investment (HEI) is a financing tool that is positioned to solve some of the current problems by reaching borrowers who may not quality for other home equity loans, or those who are reluctant to refinance but eager to access trapped equity.
The fundamentals of the housing market have not changed. In fact, it could be argued that more homeowners in America want access to their equity now. Homeowners still have family emergencies, weddings, college tuition payments, home improvements and other opportunities that require cash. As inflation hits, and the costs of goods and opportunities change rapidly, many homeowners would make investments now if their equity wasn’t effectively locked up.
Second-lien providers in the mortgage industry are enjoying a boom in business, but they can’t help everyone. Many potential borrowers won’t qualify for a traditional home equity line of credit (HELOC) due to poor credit or lack of income. A reverse mortgage may be off the table due to age requirements.
Homeowners have limited options for extracting the equity in their homes. Recent job changes, difficulty in showing self-employed income or a move to gig-worker status could disqualify a loan application. Replacing lost mortgage volume and helping homeowners maintain access to their equity is challenge for lenders and originators alike.
There also is a collective (but probably unfounded) fear that home prices will start to dip. Regardless of whether this is true, the fear is pushing the desire to cash out now. If the supply of new homes were greater and rates were lower, current homeowners would view selling their home and upgrading with a mortgage as a viable option to accessing cash.
But with rates high and the ability to find a new home in doubt, homeowners are opting to stay put. Without access to equity, liquidity is stymied and the benefits of this additional cash influx is missed. But an option is emerging for these people.
Home equity investments are a solution to a unique market at a unique time in U.S. history. The HEI is not a loan; it’s a co-investor relationship, otherwise known as fractional homeownership. There are several companies, mainly Silicon Valley startups, that are now offering these fractional options under various models.
The most unique models involve tokenization of the home and transference to a blockchain. But the most traditional and well-funded of these models involve licensed mortgage companies that process these investments in a standardized and familiar format.
The benefits of the HEI include a quick 10- to 12-day close, no income requirements, no monthly payments and zero interest paid (because this isn’t a loan). It allows the homeowner to retain full possession and responsibility for their home. The HEI blends the features of a home equity loan, downpayment assistance, a cash-out refinance and a private sale.
There are no restrictions on what the funds can be used for. Since the HEI doesn’t collect interest, the new investors share in the rise and fall of the home’s retail value. Repayment is typically triggered by a time limit, often five to 10 years, a refinance of the first lien or any transfer of ownership such as a sale.
In the future, these products are likely to be available on the wholesale mortgage market to brokerages and specialized financial institutions. Mortgage professionals will want to keep an eye out for the possibility of a third-party originator option to expand their business.
For originators who don’t wish to underwrite these HEIs and would rather refer a client, there are refer-and-earn programs in place for many HEI companies where a referral earns a share in the actual investment vehicle. The HEI also could be a viable alternative to the reverse mortgage and HELOC markets.
Clients who are looking to complete home-improvement projects but cannot otherwise afford to make upgrades will find this product especially useful. The initial target audience will look to replace financing for any home-improvement project, such as a pool or solar system.
Eventually, there will be an opportunity to use the HEI in the purchase market to remove mortgage insurance and help more clients qualify. The markets are wide open for this product to grow in popularity due to its flexible uses and easy deployment. It likely won’t be long before a home equity investment provider is showing up in your inbox. ●