WE’RE HEARING some institutional investors like a home equity sharing product that serves as a partial downpayment for consumers in return for a share of the home’s appreciation over time.
“There are limited capital market opportunities for exposure to single-family real estate” and “investors like the idea of buying residential real estate assets right now,” James Riccitelli, co-CEO of FirstREX, told this publication.
“It’s very efficient,” he said, depicting it as preferable to an alternative like buying rental properties because, “You don’t have to buy 50,000 homes and rent them out.” Rather, “The homeowner lives in and manages the property.”
He said it should appeal to investors such as pension funds or insurance companies with asset-liability matching aims as these target longer-duration assets and have been shifting their holdings toward hard or real assets.
Riccitelli acknowledges that there have been
He said among the key reasons why he cites experience managing one form of the product through the recent downturn, which serves as a form of stress-tested performance history.
Riccitelli also said the product was designed to avoid the kinds of risks and downsides experienced by other alternatives it might be compared to such as reverse and share appreciation mortgages or downpayment assistance.
It is not a loan, it does not deplete equity the way a reverse does, it does not have the kinds of conflicts of interest that led to trouble with downpayment assistance providers, and unlike downpayment-assisted loans, performance stood up relatively well under stress, Riccitelli said.
The company provided, managed and continues to manage a “sister product” called the REX agreement as a way for homeowners to tap home equity without making monthly payments through the downturn, he said.
“We managed them through the turmoil,” something he acknowledges was “painful to investors,” Riccitelli said, characterizing losses as substantial “but less than if they had just invested in the index compared to housing market as a whole.”
He said some of these investors still work with the firm.
Riccitelli said the company “learned a lot” from managing the financial products through a tough period, although it went through some tough downsizing as it did, but it gained experience dealing with defaults and workouts.
“It’s been very useful for us to understand the behavior of the equity-sharing asset,” he said.
He said that the products were not used in conjunction with properties that “had unusual loan products on them” such as payment-option ARMs, which were found to perform inordinately poorly during the downturn.
REX agreements were more tightly underwritten than such products, Riccitelli said.
The company has
Bonnie Sinnock is managing editor of National Mortgage News and editor of Origination News. She has been covering the mortgage industry since 1995.
