Home equity investment contracts are having a moment, with the introduction of
Traditional lenders and fintechs alike are responding to what they think will be elevated consumer demand for nontraditional lending options by bringing various products that could address both high refinance rates and available equity.
Referred to commonly as either shared appreciation or home equity investment platforms, the model offers consumers the opportunity to draw from their property value in exchange for an interest stake in it until repayment, which could be after an agreed-upon date or at time of sale or homeowners' death.
Among the segment's recent wins, Unison announced a partnership with the global investment firm Carlyle, which is making a strategic investment into the home equity appreciation platform and will provide resources for Unison to also unveil a new interest-only loan.
The loan combines the benefits of a mortgage with an equity draw, the company said. The cost of the loan is offset by sharing a portion of the home's future appreciation, as well as partially deferred interest.
Through the new investment, Carlyle is set to buy up to $300 million of Unison's new home equity loans on the secondary market.
"Unison is a leader in equity-sharing agreements and we're confident our expertise in asset-backed finance can help increase origination and awareness for this new capital solution for homeowners," said Akhil Bansal, head of credit strategic solutions at Carlyle, in a press release.
Unison's product rollout follows news of a $280 billion raise in capital by Unlock Technologies, which promises consumers the ability to get loans on the future value of their homes. In an agreement with D2 Asset Management, the fintech is set to receive $30 billion through the Series B equity investment, with another $250 million capital commitment to support its growth.
Unlock said it plans to use the cash to expand both product offerings and upgrade technology. The funding will also help it embark on efforts to expand its national footprint.
In the secondary market, investors are seeing an
Compared with closed-end home equity loans that come with a fixed coupon, HEI securitizations have more nuances that ultimately make the final return on investment a guessing game.
Most usually combine a coupon rate with some shared appreciation. "It depends on how the product is structured. Some of these — and there's a wide variety of these out there — have minimum yields that are higher than zero. In that case, the investor will get the minimum regardless of what happens to the home price," said John Beacham, CEO of Toorak Capital Partners.
"You're taking the risk of home appreciation being higher or lower than expected," he added. The risk of delinquencies or nonpayment could also be higher than expected.
As a relatively new offering, though, HEIs still come with a number of questions and potential for unwelcome surprises when the bill comes due for customers, depending on the amount of appreciation that has occurred.
Where the segment is seeing challenges and legal pushback emerge is among state consumer regulators. At the root of the problem is the lack of clear regulatory guidelines for the products, said Andrew Pizor, senior attorney at the National Consumer Law Center.
"Some courts have said they're not loans, because at the time they're written, there's no certain obligation, you have to pay something back," Pizor said.
"There's a whole laundry list of consumer protection laws that don't apply to these, so they're essentially unregulated," he said. Among the rules that are not enforceable is the Truth in Lending Act.
One company attracting both favorable and negative publicity this year is Easyknock, which
The NPR report specifically detailed problems certain consumers had with its sale-leaseback product. Some state regulators are claiming the company employs "dishonest" marketing tactics that hide the fact sale-leasebacks involve ceding homeownership to Easyknock, effectively making the company their landlord. Easyknock is also facing lawsuits in several states.
In one of those cases, the company celebrated a victory in early October, when a Texas court ruled in favor of Easyknock in arbitration, affirming the sale-leaseback contract it had with plaintiffs as a "valid and enforceable contract." The couple suing the platform had claimed fraud and misrepresentation over what they considered a "disguised loan."
Unison, one of the first companies to introduce shared appreciation transactions, is also being sued in Colorado by a customer who claims they went bankrupt from their agreement. The National Consumer Law Center is providing legal assistance to the plaintiff in the case.
"NCLC believes they should be regulated as loans, because they really work that way from a consumer's perspective," Pizor said.
Developments on the state level could signal possible future regulatory challenges to how HEIs operate. Two states, Maryland and Connecticut, moved to classify home equity investment products as loans, placing them under the same stricter rules that apply to mortgages. Similar legislation in Washington State was considered this year but failed to pass following industry pushback, Pizor said.
Mortgage banking leaders in Massachusetts are currently pushing for HEIs to be classified as loans and their providers as lenders, who should undergo the same scrutiny their industry does.
