Instead of taking on additional debt such as a home line of credit (HELOC) or home equity loan to tap into equity, these deals — often referred to as home equity agreements (HEAs) or home equity investments (HEIs) — 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. 

“We 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,” Burnett said.

Hometap is among a handful of companies — including Unison, Unlock, Point and Aspire — that offer home equity investments. In exchange for providing homeowners a lump sum of cash, they receive a share of the home’s future value or future appreciation.  

Fintechs involved in homeownership investments have been around for nearly two decades, but it wasn’t until recently that a handful of them have been backed by big investors seeking to take the HEI product mainstream.

“Affordability has always been a challenge,” said Ashkán Zandieh, managing partner and industry chair at the Center for Real Estate Technology and Innovation. “In 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. 

“And 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.”

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. 

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.

Turning point

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 and rated by DBRS Morningstar.

DBRS Morningstar’s 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.

“More securitizations, more availability of securitized investors’ 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,” Craft said.

The importance of being rated is to create more “depth” for the market, said Eoin Matthews, co-founder of Point. 

Point and Redwood Trust completed their first securitization of Point’s home equity investment assets, issuing about $139 million of rated asset-backed securities in October 2023.

“There’s a lot more capital in the picture — in particular, insurance capital — which needs the rating for them to buy the bond,” Matthews said. “So, 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.”

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. 

Craft expects these shared equity offerings to come to the market with “far more regularity,” with at least five anticipated by the end of this year.

“We 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,” Craft said. “We 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.”

Potential partnerships

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.

“We 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,” Arens said.

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 requirement if buyers take out a conventional loan with a down payment of less than 20% of the purchase price.

“I think that’s probably where the greatest product market fit you will have within the real estate community long term — leveraging equity to help a consumer buy a home in the future,” said Michael Micheletti, chief marketing officer at Unlock.

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. 

“While today’s 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,” Craft said. 

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.

“Over the last few quarters, we’ve begun collaborating with sellers to roll out our HEI product to their clients,” according to a year-end 2023 Redwood Trust shareholder letter.

“To 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.”

Looming challenges

The small size of the home equity investment market means potential for growth but also equates to fewer regulations compared to the mortgage industry, which requires strict disclosures and protections for consumers. 

“From a consumer protection standpoint, it’s a bit of a Wild West,” said Jenny Song, principal at Navitas Capital, a real estate and construction technology-focused venture capital firm.

Song noted that fintech companies have been able to create returns for their investors through certain deal structures that are punitive to customers. And because there are different types of structures, it’s hard for consumers to make an accurate assessment.

“A lot of them have downside protection, where your house might be worth $1 million, but they’re underwriting it to $800,000,” Song said. “If your property doesn’t even appreciate, you somehow have to come up with whatever that gap is.”

From the fintech’s point of view, they are going up against larger players — including the banks in the industry with bigger balance sheets.

“The established players are usually the banks that hold your savings, checking account. All of these alternative financing solution companies have to compete with that … so the cost of customer acquisition is expensive and channel partnerships are already in place,” Zandieh said. 

While the big players are already partnered with real estate agents and brokerages to access potential customers — capturing them early on in the early home search process — home equity investment companies generally don’t get involved until a homeowner looks to tap into their equity, Zandieh said.

It also remains to be seen how a lower interest rate environment will impact HEI providers as it will make borrowing costs less expensive for homeowners and prospective buyers.

“As rates go down, we are a more compelling alternative investment vehicle for a broader swath of investors as well, which hopefully creates additional demand on the capital side and provides more competitive pricing to our homeowners,” Burnett said.

Despite the uncertainties of regulations and macroeconomic factors, continued consumer demand for home equity investments as well as rated securitizations of home equity agreements add to the optimism for potential market growth.

“Home equity investment is growing as consumer debt is at an all-time high and consumers will be looking to leverage their home equity much more,” Micheletti added.

“What were HELOCs doing 10 years ago? Were they doing a lot of volume? No, you could barely get one,” Micheletti said. “I think it really comes down to, ‘What is the use case?’ It comes down to consumer demand and you have to have a good product market fit.”