\n<\/p>\n
\u201cWhat if homeowners could tap into home equity without taking on debt?\u201d<\/p>\n
When Hometap<\/strong> launched in 2017, the Boston-based fintech offered an unorthodox answer to this question for homeowners looking for an alternative to a loan. Through a home equity<\/a> investment, homeowners can receive cash upfront in exchange for a share of the home\u2019s future value. In return, Hometap gets an agreed-upon percentage of the sale price or appraised value within a 10-year period.\u00a0<\/p>\n Instead of taking on additional debt such as a home line of credit (HELOC<\/a>) or home equity loan to tap into equity, these deals \u2014 often referred to as home equity agreements (HEAs) or home equity investments (HEIs) \u2014 are debt-free, equity-based financing that provide relief for clients with a variety of financial needs, said Dan Burnett, head of investor product at Hometap.\u00a0<\/p>\n<\/p>\n \u201cWe do see this as a new asset class in the real estate ecosystem and we see it as complementary to traditional debt options that exist today,\u201d Burnett said.<\/p>\n<\/p>\n Hometap is among a handful of companies \u2014 including Unison<\/a><\/strong>, Unlock<\/strong>, Point <\/strong>and Aspire<\/strong> \u2014 that offer home equity investments. In exchange for providing homeowners a lump sum of cash, they receive a share of the home\u2019s future value or future appreciation.\u00a0\u00a0<\/p>\n<\/p>\n Fintechs involved in homeownership investments have been around for nearly two decades, but it wasn\u2019t until recently that a handful of them have been backed by big investors seeking to take the HEI product mainstream.<\/p>\n<\/p>\n \u201cAffordability has always been a challenge,\u201d said Ashk\u00e1n Zandieh, managing partner and industry chair at the Center for Real Estate Technology and Innovation<\/strong>. \u201cIn addition to that, conventional underwriting does not serve the new-age economy such as gig workers, so you are seeing this demand for alternative financing.\u00a0<\/p>\n<\/p>\n \u201cAnd with rising home prices and the growing burden of traditional mortgage debt, homeowners are looking to tap into their home equity without taking on additional debt.\u201d<\/p>\n The home equity investment is a new concept for many homeowners and is still small compared to the size of the traditional mortgage market. The annual investment volume in the U.S. is estimated to be in the $2 billion to $3 billion range, a figure estimated by home equity investment companies.\u00a0<\/p>\n<\/p>\n The market, however, is expected to grow as HEI companies seek to partner with mortgage lenders and real estate brokerages. Rated securitizations of home equity agreements and home equity investments is also adding optimism about further expansion as they signal that institutional investors are warming up to the asset class, sources told HousingWire<\/strong>.<\/p>\n<\/p>\n A turning point for the home equity investment market came with the closing of the first rated securitization of notes backed by HEAs in September 2023. The notes were originated by Unlock Technologies, issued by private investment firm Saluda Grade<\/strong> and rated by DBRS Morningstar<\/strong>.<\/p>\n<\/p>\n DBRS Morningstar\u2019s rating of the $224 million securitization opened up new types of bond buyers that have inherently lower costs of capital, Saluda Grade CEO Ryan Craft said.<\/p>\n<\/p>\n \u201cMore securitizations, more availability of securitized investors\u2019 capital, and eventually the ratings that have now come to the market are likely to drive down the cost of financing. And that has already started to happen,\u201d Craft said.<\/p>\n<\/p>\n The importance of being rated is to create more \u201cdepth\u201d for the market, said Eoin Matthews, co-founder of Point<\/a>.\u00a0<\/p>\n<\/p>\n Point and Redwood Trust<\/a> <\/strong>completed their first securitization of Point\u2019s home equity investment assets, issuing about $139 million of rated asset-backed securities in October 2023.<\/p>\n<\/p>\n \u201cThere\u2019s a lot more capital in the picture \u2014 in particular, insurance capital \u2014 which needs the rating for them to buy the bond,\u201d Matthews said. \u201cSo, the rating just opens up this massive world. To put a sense of scale on that, insurance capital is about $8 trillion, and about half of that goes into the bond world.\u201d<\/p>\n<\/p>\n Since Unlock and Saluda Grade completed the first securitization to include home equity agreements in August 2021, at least eight additional HEI-type securitizations totaling $1.89 billion have been completed.\u00a0<\/p>\n<\/p>\n Craft expects these shared equity offerings to come to the market with \u201cfar more regularity,\u201d with at least five anticipated by the end of this year.<\/p>\n<\/p>\n \u201cWe are seeing, as a result of multiple issuers in the space, multiple transactions, better understanding of the products and securitized structures, and now the availability of ratings,\u201d Craft said. \u201cWe are already seeing the compression of pricing in the securitized debt market, which will have follow-through effects eventually to the pricing of the product and the competitiveness of the market, which will likely drive down prices.\u201d<\/p>\n<\/p>\n Home equity investments are likely to become essential to the home finance product marketplace. Mortgage lenders and real estate agents will need to incorporate HEI offerings into their businesses, said John Arens, head of the business unit at Aspire, an HEI platform owned by Redwood Trust.<\/p>\n<\/p>\n \u201cWe believe HEI has the potential to be a transformative innovation in home finance, not just as an equity access product but also as a down payment contribution product,\u201d Arens said.<\/p>\n In these cases, the idea is to enable consumers to tap into the equity of their current property to bring down the cost of a down payment for a new purchase. Buyers can reduce their monthly mortgage payment and potentially avoid private mortgage insurance<\/a> \u2014 a requirement if buyers take out a conventional loan with a down payment of less than 20% of the purchase price.<\/p>\n<\/p>\n \u201cI think that\u2019s probably where the greatest product market fit you will have within the real estate community long term \u2014 leveraging equity to help a consumer buy a home in the future,\u201d said Michael Micheletti, chief marketing officer at Unlock.<\/p>\n<\/p>\n Partnerships with real estate agents or mortgage originators to educate homeowners and buyers on HEI products will be key, the companies interviewed by HousingWire said. A lack of knowledge by consumers is one of the biggest tasks these fintechs face.\u00a0<\/p>\n<\/p>\n \u201cWhile today\u2019s home equity-released product inside of the equity finance world begins to migrate to offer a purchase product, a key acquisition point for homeowners will certainly be the real estate agent ecosystem. And we believe originators of HEAs, like Unlock, will certainly be targeting that,\u201d Craft said.\u00a0<\/p>\n<\/p>\n Redwood, for instance, has been buying HEIs from third-party originators since 2019 and has been providing liquidity to portions of the nonagency mortgage market. Through that effort, Redwood has established a broad network of about 190 correspondent originator partners today.<\/p>\n<\/p>\n \u201cOver the last few quarters, we\u2019ve begun collaborating with sellers to roll out our HEI product to their clients,\u201d according to a year-end 2023 Redwood Trust shareholder letter.<\/p>\n<\/p>\n \u201cTo further address the opportunity we see in home equity, we also launched a traditional second lien mortgage product to our network in January. The combination of second lien loans and HEI has resulted in a unique, coordinated solution set for our origination partners.\u201d<\/p>\n<\/p>\nTurning point<\/h2>\n<\/p>\n
Potential partnerships<\/h2>\n<\/p>\n
Looming challenges<\/h2>\n<\/p>\n