Comparing the Shared Equity Products Competing with Reverse Mortgages

Reverse mortgage lenders aren’t the only financial companies trying to capitalize on current demographic trends. In recent years, so-called shared equity products — often offered by Silicon Valley-style startups — have developed a different kind of home equity pitch to consumers both young and old.

In general, these firms offer upfront cash in exchange for owning a specified percentage of the home, with the company then sharing in either the gain or the loss when the homeowner eventually sells. Unlike Home Equity Conversion Mortgages, these products are typically not backed by the Federal Housing Administration, but can offer upsides such as lower fees and a greater proportion of preserved equity when the home is sold.

RMD decided to take a look at the different options available on the market to see how they stack up against the HECM and each other.

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Unison HomeOwner

With this shared appreciation product, San Francisco-based Unison offers between 5% and 20% of a home’s value, with “no monthly payments, no interest payments and no debt,” according to its website. Unison weathers any losses or gains on the house when it is sold, which can be up to 30 years in the future.

“Unison’s percentage share in the future change in the home’s value is variable depending on the amount invested and can be between 17.5% and 70%, with the most common share being 35%,” according to the company.

Because Unison is “only-co-investing in the future change in value,” borrowers can allot existing equity to inheritance planning, which may make this option more attractive than a HECM to some borrowers, chief strategy officer Brian Elbogen told RMD.

“A lot of people don’t qualify for HECMs because they have too much existing debt on their home that needs to be paid off from the proceeds first. This is especially important because American seniors are increasingly taking on more debt in their homes later in life,” Elbogen said.

Unison’s Homeowner program has no age restrictions. As far as additional costs, Unison deducts a 3.9% transaction fee from the cash proceeds at closing. This fee covers all other costs, such as the appraisal and inspection before closing.

Irene Retirement

Currently only available in New Jersey, Irene offers seniors cash up front through its two programs: the Safe Stay and the Safe Lease Back. Within the Safe Stay product, customers sell their homes to Irene and continue to live there for the remainder of their lives, with Irene inheriting the house upon death. Typically these borrowers have a lower outstanding mortgage balance.

The Safe Lease Back, meanwhile, is targeted at those who need to access a larger portion of their equity and have higher outstanding balances. It allows homeowners to sell their homes to Irene and then pay monthly rent to stay in the dwelling. With both programs, as the new owner, Irene pays for insurance, taxes, and the structural upkeep on the home, according to the company’s website.

This kind of arrangement has a precedent in the world of commercial real estate, in which management companies — including firms that operate office buildings and medical facilities — sell their assets to an investor such as a real estate investment trust (REIT). The management companies continue to operate the buildings with an influx of capital, paying rent to their new landlord.

For both of Irene’s programs, the amount of cash that homeowners can access depends on factors like the home’s value and existing debt.

EasyKnock

Launched right before October’s HECM rules changes, EasyKnock’s “Sell and Stay” option also provides sale-leasebacks to sellers. With this product, consumers can immediately convert all of their equity to cash, minus a 1.5% commission. Similar to Irene’s Safe Lease Back program, the homeowner sells their home to EasyKnock and then becomes a renter.

“For us, it’s just much simpler,” CEO Jarred Kessler told RMD last fall. “We don’t have to create regulation around it. It’s not a home equity product. We’re essentially selling someone’s home, and then we’re finding an investor to be their landlord.”

Because there is no age threshold, this is another option for homeowners who are looking to convert equity into cash but are not yet HECM-eligible. With New York City-based EasyKnock, the consumer can move at any time or buy back the house, which would cost the funding amount plus an inflation premium.

In addition, Kessler noted that his company isn’t trying to necessarily compete against traditional mortgages.

“We are not looking to compete with loan officers,” he said. “Unlike other products, we are looking to partner with them when they can’t service their clients and we will pay referrals.”

Point

The Palo Alto, Calif.-based Point gives homeowners the ability to sell a small fraction of their equity, typically between 5% and 10% of the home’s current value. Within 10 years, the homeowner can sell the home and pay Point through escrow, or buy back Point’s investment and remain in the home. To be eligible, a homeowner must retain at least 20% of the home’s equity after Point invests.

As for additional expenses, homeowners are responsible for their home’s appraisal fees, escrow costs, and Point’s processing fee of between 3% and 5%.

Point is another option for those under the age of 62 and are comfortable with a 10-year timeframe.

“For seniors who have a strategy to exit or downsize, those instances have worked out perfectly,” Eoin Matthews, Point’s chief business officer, said.

Written by Maggie Callahan

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  • The presentation might as well have been written by the marketing teams at each of these companies. Nothing is shown about the legal structure that would allow reverse mortgage originators to compare these true “equity release transactions” to reverse mortgages.

    The following clause makes no sense: “…with the company then sharing in either the gain or the loss when the homeowner eventually sells.” Certainly none of these contracts are written to share in loss alone and, in fact, few if any of them are written so that the equity buyer shares in any loss.

    Imprecise language as used above, neglects the situation where the seller could have a gain but the equity buyer a loss. If 1) the home owner purchased the home for $300,000, 2) at the date of the equity release transaction, the home is valued at $400,000, and 3) the home is sold at a net price of $390,000, the homeowner has some portion in a $90,000 gain (for all purposes) while the equity release purchaser MIGHT have to share in a portion of a $10,000 loss.

    Nothing is said about how fix up and selling costs are shared and who controls the decisions regarding those costs. Also what about home improvements after the equity release transaction is completed, will the equity purchaser share in those costs and at what time in the equity release timeline? Further, most equity release transactions require a minimum amount from the sales proceeds if the net sales price is lower than the value of the home on the date that the equity release transaction occurred.

    The Safe Stay Irene transaction seems to be nothing more than a conversion from tenancy (and ownership) in severalty to life tenancy with the equity release company holding the remainderman’s interests. A sale leaseback is common even in family retirement planning with children as the purchasers. Yet the author fails to mention if options to purchase the home back by the existing homeowner or heirs can be acquired as part of each of these transactions. Are there any rules about selling the life tenancy or leasing it?

    In the lease back transaction, nothing is mentioned about the process by which an agreed sales price is reached. It also mentions nothing about how the lease payments are determined. Knowing some who have negotiated such deals in the commercial real estate area, the equity release buyer sometimes give favorable sales prices but terrible lease terms. The same is true if low lease payments are required, then the sales price is generally very low.

    Be careful about compensation paid for bringing seniors to these companies since in some states, a real estate license is required to receive compensation. Remember how hard it is to pay finder’s fees because of RESPA? Generally such rules apply under state real estate laws as well. Then there is the question of providing HECMs if a human originator is also collecting fees on real estate transactions.

    If you find yourself in competition to one of the true equity release transactions in the article, it is more important to read the contracts that the buyer will be signing to pull out any areas of difference that the prospect should be considering. But the fact is sometimes these transactions are a better for prospects than reverse mortgages, whether the prospect is eligible for a reverse mortgage or not.

  • Prior to 1989 all that was available was the “Shared Appreciation Reverse Mortgage”!

    This was a clause in the note and and mortgage that allowed the lender to take all or a percentage of the equity at the time of sale or death of the borrowers! Most took a percentage of the equity.

    However there were some private sources that actually required the senior to transfer title!

    These loans were made by private sources, mortgage companions and even some state chartered banks. I am sure many of you remember this. In fact, this is where the misconception all started and came from when you hear a senior say to you:

    “Oh yes, this is where the lender takes your Home”! How many times have many of us heard that over the years?

    I have my doubts on the Unison’s program. Then you have Irene’s “Safe Stay and the Safe Lease Back programs” and now we have the company Easy-knock with there program, “Sell and Stay” program, what else is next?

    I agree, each of these programs offer something different than the HECM and it enables many to get equity out of their home in a way they could not with the HECM! I still have grave concerns about these programs!

    I know we have been hearing all about the proprietary Jumbo programs as well, but that is a completely different product and story. First off, they are programs developed by the elite’s of our industry. They are for for high valued properties and they are a true reverse mortgage product with out the shared appreciation clause built in!

    Time will tell on these other programs and if the public will buy into them. Maybe those that don’t have the age limits tied to them will have luck with the younger generation?

    John A. Smaldone
    http://www.hanover-financial.com

    • John,

      I was not aware that the one true elite in our industry today, AAG, has come out with its own proprietary reverse mortgage. Even Wells at its peak in our industry never came out with its own proprietary mortgage. In the last two decades which firms can even match these two monsters but neither had their own proprietary reverse mortgages.

      As to sharing arrangements, I never saw one that defined its take based on equity. All I ever saw took a share of the appreciation in the property, not a defined share of equity (i.e., with the exception of the HECM Shared Appreciation Rights agreement). There is a clear reason why that standard was used. Equity is the value of the homes minus the total due on all valid claims against the home. Equity release providers never want to deal with added debt.

      • George,

        I never mentioned AAG came out with their own proprietary program? In fact, AAG has teamed up with FAR, utilizing their Home Safe proprietary Jumbo!

        As far as the share in the equity of a home when the Shared Appreciation Clause came into play on a reverse loan, yes, many lenders spelled out the terms of the percentage of the “Equity” they would retain!

        Maybe I should have used the term the net proceeds realized from the sale of the property after the sale of the home or disposition of the home in the event of death of all borrowers on record!

        I was in a sense saying that George when I used the term, “Sharing in the equity”!. I am going to assume you were in the mortgage industry prior to 1989, if you were, you should have remembered the reverse mortgages that were being made in the private sector.

        The shared appreciation clause was used then on 99.99% of every reverse made that I know of.

        In fact, which I may be wrong, up to not to many years ago and it still may be in the note, we still have the shared appreciation clause in there. However, it is not being used anymore but I hear some lenders are talking about utilizing a hybrid of it George?

        I hope I answered your questions to your satisfaction? Make it a good one!

        John A. Smaldone

      • John,

        While a few lenders are offering their own brand of proprietary reverse mortgage, few of the elite have. Those who are offering them are certainly not all offering them in every state.

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