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This startup wants a stake in your home, poor credit no problem
[WASHINGTON] Nicole Bennett wanted to pull cash out of her house in Antioch, California, to reduce a growing mound of debt. When Bennett's mortgage lender, Wells Fargo & Co, refused the social worker because her credit score was too low, she turned to a technology startup called Point Digital Finance Inc.
In October, Bennett got the almost US$40,000 she needed to pay down debt that was costing her more than US$1,900 a month in car, personal-loan and credit-card payments. In return, Palo Alto, California-based Point - which is backed by investors including Greylock Partners, Andreessen Horowitz and Vikram Pandit, the former chief executive officer of Citigroup Inc - wanted to own a piece of her property.
"I have all this equity in my house but I couldn't use it because of my credit score," said Bennett, whose FICO score was less than 600, on a scale of 300 to 850. "I can breathe now because all my money isn't going out the door." Financing to homeowners is loosening up after a 30 per cent increase in property values nationally since the 2012 trough. While many lenders have been letting the most credit-worthy borrowers tap their homes' equity, Point is targeting customers who have been largely unable to trade accumulated wealth for cash or don't want to take on the additional monthly payments associated with traditional loans.
In the years leading up to the real estate crash, easy financing helped people buy homes they couldn't afford and then borrow against their equity as property prices rose. The collapse in home values ripped through banks that bought mortgage securities, helping trigger the US recession. At Citigroup, CEO Charles O "Chuck" Prince was ousted in 2007 in the face of mounting losses tied to subprime mortgages and replaced by Pandit, who himself left three years ago.
Since home prices bottomed in 2012, banks have reduced the percentage of cash borrowers can take out when refinancing and tightened credit standards for home-equity lines of credit, HELOCs, requiring higher FICO scores and full documentation.
A typical HELOC is a second mortgage, repaid monthly with interest, that homeowners can use in full or draw on as needed. Point is making an investment in the form of equity, so customers have no obligation to pay the firm back until they sell or refinance their homes, for as long as a decade. That type of funding could ultimately cause financial issues for the homeowner, said Sarah Edelman, director of housing policy at the Center for American Progress.
"While it may be appealing to get an upfront lump sum of cash, the risk here appears to be that a consumer could end up with a more expensive product with harsher repayment terms than they would with a more conventional loan," said Edelman, whose Washington-based policy institute promotes economic mobility.
Many Americans with high debt-to-income ratios and low credit scores have limited financing options. For personal loans, both LendingClub Corp and Prosper Marketplace Inc customers have average credit scores of 700 or above. And the traditional home-equity lending market has been open primarily to borrowers with good credit.
"The home-equity market is still very restrictive," said Greg McBride, senior financial analyst for personal-finance data provider Bankrate Inc, adding that FICO scores are a major factor in determining whether a person qualifies for financing. "It starts getting tougher below 680. Below 620 it is both really hard and really expensive." Rate Capped With Point, credit scores can be less than 620, but homeowners must have at least 25 per cent to 30 per cent equity in their houses. Point adjusts the cost of its investment based on the owner and the property, taking a larger percentage of price appreciation from riskier customers. Should the homeowner not pay Point, the firm has the right to sell the home to recoup its investment and take its portion of the gains.
Those who decide not to sell their homes have to pay the company back at the end of the 10-year period, similar to a loan, with an annual effective interest rate that's capped at about 15 per cent, comparable to rates on some credit cards or unsecured consumer debt. Annual percentage rates at LendingClub range from 5.32 percent to almost 30 percent on three-year personal loans.
Point is investing in properties it expects to appreciate in value, initially focusing on California, with plans to fund homeowners in other states next year, according to a company marketing document. Home prices nationally are set to rise about 5.5 per cent this year and may increase an additional 5.9 percent in 2016, according to CoreLogic Inc.
"If your home does well, we both do well," Point CEO Eddie Lim, who previously co-founded a payments platform acquired by Visa Inc, said in an interview. "If your home doesn't do that well, then this was one of the cheapest sources of financing that you could have obtained." For investors, the firm is trying to unlock some of the equity in residential real estate and make it a more liquid asset class that can be traded, Lim said. He's raised money from investors - separate from the company's venture-capital backers - to fund the equity products. The firm already is selling them to family offices and hedge funds that buy residential-mortgage bonds and has plans to securitize them as well.
Part of Point's plan is to improve the financial stability of its customers because the firm transfers funds directly to pay off their debts, according to the marketing document. Other backers of the company, which Lim started in January, include Ribbit Capital, SV Angel and Bloomberg Beta, the venture-capital arm of Bloomberg LP, the parent company of Bloomberg News.
Apple Employee Point's customers, aside from Bennett, include homeowners such as an Apple Inc employee who makes US$128,700 a year and owns a Mountain View, California, house appraised at US$1.38 million, according to the firm's marketing document. The logistics program manager, who owes about US$715,525 on the property and has a credit score of 644, wanted US$85,000 from Point to pay off debt from home renovations, the document shows.
In addition to Point, two firms - San Diego-based EquityKey Services LLC and San Francisco-based FirstREX Agreement Corp - are back in the equity-sharing business after they stopped doing deals when property values collapsed.
Restrictive lending standards are driving investors to come up with more creative solutions for people to leverage home equity, said Daren Blomquist, vice president of RealtyTrac. Firms like Point operate with less oversight than banks and other lenders, because they're offering products that are structured as equity rather than debt.
Investors banking on future appreciation and expecting home prices will continue to go up should proceed with caution, according to Blomquist.
"We're seeing evidence that home prices in many markets are slowing down," he said. In one, the San Francisco Bay area, growth has slowed to a single-digit pace, "down from consistently double-digit appreciation in the past couple of years." Point Digital Finance discounts the appraised home value of its customers to account for the risk and generate greater returns earlier.
Bennett, the social worker, said she has no plans to sell her five-bedroom house, appraised at US$415,000, because she wants her 7-year-old son to have it eventually. Now that her personal loan from Springleaf Financial Services and auto, credit card and payday-loan debt with interest rates as high as 110 percent are paid off, she can start saving money, she said. Even if her home skyrockets in value, the highest annual interest she'd have to pay back is 14.8 per cent, according to Point.
"You can pay them back before 10 years is up, so that's my goal," she said. "My plan is to pay them back way before that."