Reverse Mortgage Alternative Product From EquityKey Returns

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EquityKey is back and offering a new way for qualifying homeowners to receive 8%-16% of their property’s value in exchange for a share of the future appreciation of the property.

Often referred to as an alternative to a reverse mortgage, EquityKey started to gain some traction right as the markets collapsed but was forced to suspended new deals in November of 2008 after KBC Financial Products (former owner) cut off funding. In March of 2009, the company’s founders were able to purchase the company back from KBC and began looking for additional funding to bring the product back to the market.

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The new EquityKey Home option is similar to the old offering but no longer requires homeowners to pass a physical in order to qualify for the insurance aspect of the product.  Previously, EquityKey took out an insurance policy on the borrower when the agreement is signed to help protect the downside of the transaction.

With the new EquityKey Home option, the company determines the appreciation of the home not by the future sales price but by using the S&P/Case-Shiller Home Price Index that covers the area where your property is located.

“We use the Index as an objective tool to measure your home’s appreciation,” says the company. “The Index is managed and controlled by Standard & Poor’s, the world’s foremost provider of independent credit ratings, indices, risk evaluation, investment research and data. We have no control over the Index or its performance.”

At the start of an EquityKey Home Option, the home is appraised and an initial value is established. EquityKey pays between 8% and 16% of a home’s value to purchase between 50% and 100% of the home’s potential appreciation.  As an example, for a home with a value of $500,000, EquityKey would pay between $40,000 and $80,000.

At the end of the transaction, if the Index has increased, the amount of the increase is used to establish the appreciation.  EquityKey then receives its percentage of the appreciation as determined in the original agreement.  If the Index is the same or lower at the end of our transaction, there has been no appreciation and, consequently, EquityKey is not entitled to any payment (assuming you have not breached the agreement or ended it early).

The product was often referred to as an alternative to a reverse mortgage because it can provide more flexibility than the HECMand homeowners aren’t taking on any new debt.  In addition, only one owner listed on title must be between the age of 55 and 85 and the option can be used on your primary residence, secondary residence, residential investment or vacation properties said the company.

The costs are also lower than the HECM, the only fee is a $300 application deposit  which is reimbursed if the transaction funds or they are not able to qualify.  However, the HECM program will typically provide much more money to the borrower, so there are trade offs to consider.

Currently, the program is only available in certain parts of California.  Other areas like Portland, Chicago, Seattle, Denver, New York, and more are expected to be added later this year.  To see how much you can qualify for, check out their calculator here.

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  • In the right circumstances this is a great product.

    Be aware by law it requires a real estate license to provide this real estate option to your customer because it falls under real estate not lending law. Per HUD one cannot provide services that require a real estate license (outside of lending) and also originate HECMs.

    Glad to see this product back. Who knows maybe — just maybe — this is a sign that proprietary products are not far behind.

    “Just wishin' and hopin'….”

    • Dear oh dear, when is there going to be some true innovation in equity release products and their derivations. Shared appreciation mortgages were a disaster in the UK where they were invented years ago.

      They have the potentiual to be many many many time dearer than a reverse mortgage for very little monetary return (and we all know how expense reverse mortgages are – doubling the debt every 9 years due to compounding interest).

      This is so where 2 circumstances occur (both of which were the cause of numerous class actions in the UK against advisers and propduct providers):

      1. Where the SAM is taken out at the bottom of a property cycle (just as the USA is in right now due to the GFC !!!) resulting is above-normal capital appreciation and super-profits to the lender – no wonder these people are trying to rush back into the market right now to offer SAMs;
      2. Fraud or deliberate undervaluation by the Lender (or their panel valuers) at the time you enter into the SAM so as to inflate the capital appreciation and inflate profits; and/or
      3 Cherry-picking of zipcodes limiting access to only those areas where the Lender sees the greatest chance of capital appreciation and resultant profit. This doesnt help the majority of retirees at all – they arent even eligible for a SAM in most cases.

      Why on earth a Lender wants to take on capital appreciation risk as well as their regular prinicpal repayment risk is totally beyond me.

      If you want a further guide to the dismal failure of SAMs look also to Australia where they launched by Rizmark but failed to sell. So they re-packaged them for first home buyers as a home deposit top-up product to help first home buyers into the housing market.

      If you want a true guide to how risky a Lender's product is then ask what its BASEL II risk wieghting is. Forward mortgages are risk weighted at 50% (non-standard) or 35% (standard or with loan mortgage insurance). By comparison, reverse mortgages and SAMs are risk weighted at 100% for a reason – they are very risky financial products in the eyes of all OECD bank regulators and for good reason.

      • johinnes,

        Equity Key options are not SAMs; they are SAOs or shared appreciation options. In the 90s, reverse mortgages were offered with SARs (Shared Apprecitaion Rights). Although I have been in the reverse mortgage industry for a while, I have never seen one. Other than a few ol' timers who were skilled at selling them, there is little, if any, support for their return.

        In most states it requires a real estate license to sell Equity Key but a mortgage license or registration to sell reverse mortgages. The products are not contected in any way.

        Many of the fixed rate HECMs I am providing right now will not double from their beginning balances until at least 11 years from now. I am lost with your 9 year rule.

        I have a long-time close friend who I put into an adjustable rate HECM over 6 years ago. She has never used it other than paying off her existing mortgage. Her initial beginning balance due has grown less than 30% of where it started and she has made no payments paying the balance due down..

        We are all aware that reverse mortgages are very risky. That is what makes fixed rate HECMs a desirable product to so many investors. The consumer (or lender) is buying insurance from a department of the federal government which insures the pay off to the investor.

        Rather than focusing your risk analysis on SAMs, maybe you could give give us the risk rating on real estate options on SARs. I am certain they are about the same as SAMs. What is the risk rating for a HECM?

  • I completely disagree with The Critic on this one as the re-entry of this “shared appreciation” product was a complete disaster in the past, and it will not serve us well in today's regulatory environment.

    Shared-appreciation “reverse mortgages” almost brought our industry to a complete collapse about 15 years ago and if you think we are getting bad publicity now, just wait.

    If you think state regulators and legislators are out of control now, just wait until they get wind of the return of this product.

    I just don't see how anyone in our industry could possibly be “glad to see this product back”.

    • reversemaniac: would you please share with us any sort of reference material to support why this is “bad”? It sounds good to me, but if someone is saying it's not good, I'd like to know why.

      • I never said it was “bad”. I said the shared appreciation product from the past almost destroyed the reverse mortgage industry.

        The product you offer may be vastly different than the “Freedom Share” products of the past, and according to some of the other posters here, your product may be good in some instances.

        Regardless of what you call it, or how you have structured the product, it is NOT a reverse mortgage, and any implication that this product belongs in the “reverse world” could have serious repurcussions on those of us who are.

        You can sell this real esteate transaction any way you want as long as it is legal and I wish you well.

        However, please do not promote your product as a reverse mortgage and please do not affiliate yourself with NRMLA in any manner whatsoever. We have enough people ready to pounce on us already, we don't need any more undue attention.

    • “Reversemaniac: how was this a disaster in the past? I think you are confusing it with shared appreciation mortgages. These guys aren’t a mortgage, they aren’t a loan. EquityKey seems to be betting on the long term appreciation of real estate, and if they are wrong, the homeowner keeps the money, owes nothing, and has all their original equity. Compared to a reverse mortgage where there is an absolute and certain erosion of equity regardless of growth, and relatively high closing costs (EquityKey I think has no fees to the homeowner?). Further, with a RM, if you leave the home for more than a year, you are out as the loan is due. Not so with this product… as long as you hold title, you keep the home, and all of the power to decide remains in the hands of the homeowner. As a fiduciary, I have illustrated the merits of both EquityKey and Reverse Mortgages to my clients, and it depended on their specific needs as one solution doesn’t fit all. So tell me again, “reversemaniac”, since EquityKey is yet another alternative, and at that is one with lower fees, no erosion of equity and not having a loan called if you vacate the house….how is this a disaster?”

      • It would be nice if someone actually read my postings.

        Here is my only point: the Equity Key product is a shared appreciation product, it is not a reverse mortgage.

        I stated clearly that this product can be sold wherever it is legal and I wished Equity Key well.

        My fear is that state and federal legislators and regulators will not understand that the Equity Key product (real estate transaction) is NOT a reverse mortgage.

        Since shared appreciation products (or mortgages) in the past were subject to multiple class action lawsuits, how can I not be concerned that reverse mortgage lenders could once again, be “painted with the same brush”?

        Those who do not learn from the past are destined to repeat the same mistakes.

      • finadvisor21,

        I hope you never offered both HECMs (or any other FHA insured mortgage) and Equity Key at the same time in your business. It does not matter if it was to the same client or not. Per HUD rules, they are incompatible.

        To analyze both as a fee only financial advisor is OK. But if you receive any commission or other compensation due to the purchase of the products, be aware, you are in violation of HUD mandates.

        I have heard of a CPA who did not offer HECMs (or other FHA insured mortgages) but offered proprietary reverse mortgages and Equity Key. That seems to be OK.

  • One more comment. I sure hope NRMLA does not allow this company to become a member and/or an exhibitor like they did before. If so, I will have to seriously re-evaluate my membership.

    This shared appreciation product is NOT, NOT, NOT a reverse mortgage, nor is it even close! It is nothing more than a real estate transaction betwen two parties and should be viewed as such.

    Finally, I think NRMLA should make it clear that we have no connection with this type of product/transaction so we don't condone it, nor do we condemn it. It is not a reverse mortgage and therfore, we have no comment on it.

    • From reading their site, I think that some state regulators will consider this a reverse mortgage. It has a deed of trust and conditions that trigger repayment principal, origination fees, and interest, in the first 10 years. These conditions fall under the term “early termination charges” which could be construed as prepayment penalties that some states do not allow.

      • Josh,

        The deal is structured as a real estate option. If the termination charge exceeds the payment to the property owner, does that turn the transaction into a loan?

        Many real estate transactions have penalty provisions. Does that make them all loans?

        Can you cite your source?

      • Critic,
        All I was saying is that there is a deed of trust recorded and “early termination charges” which sound like a prepayment penalty. Below is copy from their site FAQ. It seems to state that in the first 10 years if you decide to cut short their agreement, then you may have to pay the money you got from them originally, the 3% of the home value origniation costs, any money they had put out for your taxes or upkeep and interest on this money at 12% per year.
        Now I could be wrong, but if you have a deed of trutst on a property with conditions that make it so a client would have to pay it back with interest, a regulator may call that a loan.

        18.What is an Early Termination Charge? As we’ve stated before, we view our investment in your property as a long-term investment. In order to allow your property the opportunity to appreciate, time must pass. If you take some action that cuts short our option (e.g., sell your property or breach the agreement), we would not have the opportunity to realize the full potential of our investment. This is why we require that you not sell, transfer or otherwise convey any ownership interest in your property or otherwise breach the agreement within the first ten years. If you do, an “Early Termination Charge” will apply. The Early Termination Charge equals the greater of: (i) the amount we pay you for the option plus our origination cost (the origination cost equals three percent of the Initial Property Value) and any Protective Advances made on your behalf, plus interest on this amount at the rate of twelve percent per year; or (ii) the amount of appreciation we are entitled to at the time of breach. In the event of an early death (i.e., within ten years of the effective date of the option agreement), your estate has the right to maintain ownership of the property and avoid an Early Termination Charge. If it elects to do so, your estate would need to acknowledge our interest in the property. If, however, your estate desires to sell your property and the sale occurs within the first ten years of the option agreement, while an Early Termination Charge will still apply, the amount we paid to originate the option will not be included in the Early Termination Charge. It is important you review the Early Termination Charge provision in the option agreement and understand its consequences. If you do not anticipate owning your property for at least the next ten years, the EquityKey Home Option might not be right for you.

      • Josh,

        Although I am a California real estate broker, this is a legal issue. This comment is being written from the point of view of a real estate broker who has no relationship with Equity Key. Also I am NOT a qualified attorney opining on their documents. The following is my meager attempt of explaining what I am reading on a portion of the Equity Key website. I do not claim to have more than a simple understanding of what their website currently states in its FAQ section on this issue.

        The website clearly states that the trust deed is a very specific type of trust deed called a performance trust deed. Very importantly per Equity Key there is no note or other evidence of debt recorded with it. The Equity Key performance trust deed is allegedly recorded with the related option (not an abnormal way of recording a real estate option in California). Between the option document and the performance trust deed, the filer is attempting to provide adequate notice of encumberance based on the terms of the option.

        Without such filings, a sale of the property could take place with no notification to the option holder and could result in the seller/optionor receiving all proceeds from a sale that might otherwise rightfully belong to the option holder.

        Unless you know of other indicia of debt that is filed with the Equity Key performance trust deed, a performance trust deed in and of itself is not such evidence. But it does provide notice that somehow in someway the property is encumbered — in this particular case by an option.

        Since I have not read the Equity Key option document or the related performance trust deed which Equity Key purports to file, perhaps someone from Equity Key or their legal counsel could provide more information in this thread of comments.

        Although your concern may be warranted, anyone familiar with real estate transactions would not view this as debt. That is not to say that the penalty provision might not be subject to some oversight based on debt legal principles but that gets into legal matters which I do not possess the expertise to explore in any manner.

    • reversemaniac,

      I was surprised by the strength of your disagreement. I fully support the return of Equity Key to the marketplace — BUT — I also believe that every HECM originator who sells this product should be reported to NRMLA and HUD for disciplinary purposes.

      You are correct that the Equity Key real estate option is not a reverse mortgage but a real estate transaction. Combining the two products is a miserable idea. Yes, the combined product was done in the past but as you note, it is gone and well it should be.

      Fundamentally I agree with you. I was also bothered in seeing Equity Key at NRMLA conventions in prior years especially when they were encouraging real estate licensed HECM originators and lenders to sell their products and continue providing HECMs. It was disappointing that NRMLA took no stand. At that time Equity Key and Senior Lending Network were both owned by KBC Bank. I heard that some of the Equity Key retail marketing was done through the call center at SLN but who knows – rumors and all that.

      Other than my expression of joy over the return of Equity Key to the marketplace and of hope that their return bode better days for RM proprietary products, I really do not see how our opinions differ in any real substantive way at all.

  • I agree with The critic on one issue, this could be a sign of proprietary products coming back to the market. However, I am concerned with the shared-appreciation generic version product coming back to the market.

    Many seniors not only were confused with the loan but found out when it was to late the consequences of the shared appreciation clause. I know the skepticism of our seniors to this day is “Would we be giving our home away”.? In short, this stigmatism has plagued our industry for many years. To bring this product back into the market place will place a cloud of mistrust toward us once again by the senior and legislators as well.

    I agree with the Reversemaniac, this will create a full scale war against the reverse mortgage industry by the state regulators and at the federal level as well. We need to tread water carefully, it is very important our industry as a whole quell down the unjustified bad publicity we have received.

    Not only the publicity but we need to work very hard on re-gaining our seniors trust back into us once again. I feel a version of the shared appreciation reverse mortgage coming back into the market will set us back many years where it comes to the trust factor.

    Thank you,

    John A. Smaldone

    • John,

      There seems to be an overreaction to Equity Key. It is a real estate option based on an appreciation concept.

      Like everyone else in this thread, a combined product would be a real negative to the industry. Strange thing is, I have found proponents of the product among some “RM old timers.” Even though a combined product may add some more proceeds, it can also do great and far reaching harm to our industry. I hope it never appears again.

      • Critic,

        Good evening to you. Your point is well taken. You and I are on the same page.

        How did you like that stock market scare yesterda? If that did not wake up America, nothing will! You have a good weekend.

        Take care,

        John A. Smaldone

      • John,

        It is rare when we are not on the same page. Usually IF it looks like we are not, it is because there is a misunderstanding.

        Enjoy the rest of your weekend.

      • Critic,

        Very well put my friend but I think we agree on this one as well. Hope you had a good weekend. My wife had a great mothers day.

        Take care,

        John A. Smaldone

  • This could be an interesting financial planning product under certain conditions. Just some random (and premature thoughts): If one needs a more modest amount of money than an RM would provide, and you have no heirs or are leaving your home to a charity (taxes taken into consideration at death of last survivor) and you want the option of being out of the residence for more than a year (average nursing home stay is three years), ten this option could be used.

    I'm sure there are many negatives that the readers will provide regarding this product; bring them on.

    • dduck12,

      I could not agree with you more. It is great for people with second homes, etc. There are real positives about it. Of course there are also drawbacks in regions of promising appreciation. For many seniors with large equity in their properties who need cash but do not want to incur debt against their existing equity, this deal can be a good one.

      This product is generally not for the less financially sophisticated, those who are overly sensitive to loss of their future appreciation, etc. It is what it claims to be — the alternative to reverse mortgages.

      Many times it fits when prospects do not qualify for HECMs. Such as a $2,000,000 valued home with a $700,000 debt. A spouse under 62 does not want to come off of title but the funds from this product provide sufficient cash to meet the current need. The principal residence has a HECM but the borrowers have a second home with a low LTV and cannot afford monthly mortgage payments. Etc.

      I'm rambling so I will stop. Too much caffine today and all that.

    • Kevin,

      OK, I for one am quite astonished by your response. How is it you have arrived at that conclusion? Why would either product lead to the collapse of the HECM market?

  • In the past, theses equity deals have been more than a simple split of any future equity appreciation. There are usually a lot of extras for the lenders. For instance, the lenders in the shared equity deal may have exclusive rights over the property such as the right to be the real estate “broker” for the future sale of the home and receive a commission for making the sale. The commissions can be as high as 8%. When the home comes up for sale the lender may also have the right of first refusal. The price would be the “fair market price” of the home, determined by averaging two assessments The averaging guarantees that the “lender” gets the house at less then a top offer. The lender, as new owner, is then free to flip the home to any other buyer interested in the property. They, of course, keep all of any gain. This represents a problem for the sentimental heirs who want to buy the family home after the death of the borrower. Once the lender has gained control over the property the heir will have to pay whatever the demand. These are some of the highlights.

  • I share reversemaniac's concerns about this so-called reverse mortgage alternative. Any attempt to even compare reverse mortgages and the other product, as some of their surrogates have tried to do here in response to reversemaniac, is mischievous. It is clever “positioning.” They are selling an option on home appreciation. Their timing is perfect: Home values have no where to go but up.

    Offering 8-16 % of current appraised values for the chance to get 50-100% of home appreciation in a few years is an investor's dream because in a few years if economic and demographic trends continue to look up, appreciation could be more than current appraised values. When these smart option sellers try to collect their “just” capital gains, the New York Times and the children of the seniors will scream “predators!” We have been there before. But the creators of these home appreciation option products may be blissfully unaware of the reputation, litigation, and financial risks they are taking. They will do well to remember George Santayana's warning: “When experience is not retained, infancy is perpetual. Those who cannot remember the past are condemned to repeat it.”

    To avoid PR pain and costs, NRMLA should heed reversemaniac's advice.

  • Possible case: Single, senior woman who owns an oceanfront $4 Million home and owes $1.3 Million, and cannot qualify for a standard mortgage refi. The EquityShare could help her obtain $320,000 – $640,000. Since we don't have a jumbo reverse mortgage, this product could be a welcome alternative. When will Florida be eligible?

    • rmbarbagallo,

      I hope you are not a HECM originator. If you are, I hope you are not looking at this product as something you will offer while selling HECMs.

  • I'm rambling so I will stop.
    Good rambling Critic, keep the espressos coming.
    Your critics miss the point. This is not a RM alternative in the sense a screwdriver is not an alternative to a hammer. Each has its best usage.
    When I look at these “alternatives”, I look at them as tools to further a financial/estate plan, or a lifesaver in some cases. To some RM originators, perhaps every case looks like an RM case. As I stated above, some people need a more modest amount of money to get out from some financial problem and a loan is either impractical or costly, or they simply get a hand cramp when ever you ask them to reach for their wallet. Example: most people, I believe, should have LTCI, but balk at the “cost”. Here a RM, if one qualifies, or an EK could be used to purchase a 10 or one-pay policy. In either case, it looks a little like “found money”. If, one is not worried about providing for heirs, this could solve the greater worry of a long-term illness hitting, with the EK getting the edge because it allows renting to others so the one-residency rule for RMs is not an issue. Some people, in good health could also opt to use some of the money to buy life insurance to try and offset the 50% appreciation loss. The LI proceeds could be income and estate tax-free if set up properly.
    And, so on, and so on.
    My main concern, is the devil in the details as expressed by Prescott Cole, below. Competitive products could help that out, and I hope there are more coming especially since some posters feel this is such a “good” deal for the lender/option writer.

  • I used to always present Equity Key's former program to consumers who were interested in a Jumbo Reverse Mortgage. At first I didn't think they'd mix well together, because of the equity sharing aspect of Equity Key, but I was wrong. Some consumers liked Equity Key's program way better then a Reverse Mortgage program.

    I learned the consumer will decide on the solution they're the most comfortable with, so it's important to be able to review all their options with them.

    • rainmand,

      I do not know I would be admitting to violating HUD protocol on this website. Equity Key is not a mortgage and requires a California real estate license to sell because it IS a real estate transaction. Doing real estate transactions that require a real estate license and providing HECMs violates HUD rules. However, a HECM originator can provide mortgages.

  • The previous version of Equity Key's program wasn't a Real Estate transaction – it was an Insurance transaction, and required being licensed with the Department of Insurance in order to offer it.

    • rainmand,

      Not only am I a CPA but I am also a California real estate broker. I do not hold an insurance license.

      I worked with Equity Key for over one year trying to make the program work for our salespeople and could not. To sell the prior Equity Key required a real estate license just like it does now.

      I personally sold Equity Key since during that period my focus was on proprietary products and I originated no HECMs, though my wife did. The product was a real estate option with the “senior” as the optioner and Equity Key as the optionee. It did not require a insurance license. I spent several months working with their staff and legal counsel trying to get them to obtain a written waiver from HUD. They never got it.

      The life insurance was owned by Equity Key and it was the beneficiary on the policy. The insured interest was the investment in the option and the option itself. That is the basis on which Equity Key was able to insure on the life of the optioner but was able to be the owner and the beneficiary.

      There were many insurance licensees who worked for Equity Key but those who were selling the product were correctly required to hold real estate licenses.

      • >>To sell the prior Equity Key required a real estate license just like it does now

        The DRE license was only required during the first portion of the program, but that changed when it was determined it didn't fall under the DRE.

        I became familiar with the program when the DRE license was required, and saw it transition to the DOI, at which point a Life License was required.

      • rainmand,

        Doing what the oil and gas industry refers to as running the pig down the pipe, I just got off the phone with one former exec and their primary insurance broker. The product never went to requiring a DOI license. Towards the end it went to an “either or” situation although they preferred a real estate license since the compensation issue was far more difficult with a DOI licensee.

        As it stands today only real estate licensees will be eligible, IF they decide to use brokers. Right now they are not seeking any brokers.

  • >>To sell the prior Equity Key required a real estate license just like it does nowrnrnThe DRE license was only required during the first portion of the program, but that changed when it was determined it didn’t fall under the DRE.rnrnI became familiar with the program when the DRE license was required, and saw it transition to the DOI, at which point a Life License was required.

  • rainmand,rnrnDoing what the oil and gas industry refers to as running the pig down the pipe, I just got off the phone with one former exec and their primary insurance broker. The product never went to requiring a DOI license. Towards the end it went to an “either or” situation although they preferred a real estate license since the compensation issue was far more difficult with a DOI licensee.rnrnAs it stands today only real estate licensees will be eligible, IF they decide to use brokers. Right now they are not seeking any brokers.rnrnrnrn

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