In terms of the available options that consumers have to tap into their home equity, so far the paths toward that goal are relatively isolated to something like a Home Equity Line of Credit (HELOC) or a reverse mortgage, either proprietary or a Federal Housing Administration (FHA)-backed Home Equity Conversion Mortgage (HECM). While that is the case right now, other companies that offer different methods for a homeowner to tap into the equity they’ve built up in their home are starting to become more prevalent, particularly in forms like sale leaseback products or shared equity investments.
As these options continue to grow, so does the possibility that a more typical reverse mortgage customer may choose to opt for one of these options as opposed to a more traditional reverse mortgage, but there are also a lot of scenarios which call on both businesses to work together. This is according to a panel of executives from different alternative equity tapping companies who spoke during RMD’s virtual conference event HEQ: The Future of Home Equity in Retirement earlier this month.
Competition as a misconception
While some customers may choose an alternative product over a reverse mortgage, that doesn’t exactly mean that the two product categories are deeply embedded in competition against each other according to Jeffrey Glass, CEO of Hometap based in Boston, Mass.
“I think it may be helpful to first perhaps dispel a misperception that home equity investments are competitive with reverse mortgages, because I think for the most part, they’re really not,” Glass explains. “It is quite an adjacent product. The way I think about it is while they share a very similar, high-level goal of helping a homeowner see cash without having to make monthly payments, home equity investments are really quite different. I think it’s important to understand that typically, it’s a lump sum payment that happens upfront. There’s no interest rate. And in fact, the ultimate settlement with the company is based on the future value of the home.”
Also unlike a reverse mortgage, the risk for loss on the part of the investor is always present, Glass says.
“Home equity investment is not guaranteed a return of principal, and in fact, can lose all the capital, with there being no recourse,” he explains. “So, it’s really very different from a debt product, even though at the highest level I’d say these products are cousins. We’re a young cousin to the reverse industry, because we’ve all identified a real problem: homeowners have so much capital trapped illiquid in their home, and they have other needs for it.”
Partnering with the reverse mortgage industry
Another thing that presents a unique dynamic between the reverse mortgage industry and its “cousin” in alternative equity tapping is that the latter has sought out active ways in which it can partner with the reverse mortgage industry. This is according to Eoin Matthews, co-founder of Point in San Francisco, Calif.
“We’ve had a lot of experience partnering with folks in the reverse community and beyond,” Matthews says. “Partnerships have been a big driver of our growth. I think one of the questions that came in was just both around structure and volume. […] When I think about successful programs we’ve had in the partnership space, there have been a few key elements to it. The first is that we have a dedicated team. We’ve found that that’s pretty critical, you can’t have folks not focused on your business. We expect all of our reverse partners that their primary product is going to be a reverse mortgage. And this, as Jeff mentioned, is very complementary to what they do.”
Active collaborations between companies like Point and Hometap with reverse mortgage lenders helps to ensure that a potential customer can facilitate whatever financial goal they have that they’re looking to apply their home’s equity toward, Matthews explains.
“[Collaboration] is going to help you satisfy more homeowners, and in many cases, bridge to a reverse mortgage, which is particularly attractive for a lot of our partners,” Matthews says. “The last big factor tends to be that our partnership teams are constantly communicating around the beneficiaries. These are shared equity contracts. You’re not going to, as a senior, use up all the equity in your home. With your home equity investment product, you’re going to have something to give to your kids, to give away in your will. ]I think that’s meaningful to a lot of folks who might be considering reverse mortgage.”
Still, Point also understands the immense amount of work that the reverse mortgage industry puts in with its clients, especially in terms of serving in a more consultative capacity than is typically found in other mortgage businesses, Matthews says.
“The last thing you want to do with a homeowner is present a solution that they don’t qualify for,” he says. “We can even get into a pricing discussion before that homeowner has filled out an application. You can get into that interactive pricing discussion to talk over how it works. Our best partners really double down on these strategies, because they understand that the reverse mortgage sale is highly consultative in nature. It’s a long process, often multi-month or multi-year.”
Alternative equity practitioners also understand the work that reverse mortgage professionals do in facilitating the more consultative process inherent in the reverse mortgage business, Matthews explains.
“We appreciate the effort that goes into a reverse mortgage sale, the consultation and the relationship building. You need the tools at hand for that right moment when you’re explaining [these financial instruments] to the homeowners.”