Around 90 percent of homes in the U.S. are worth at least what their owners paid for them, if not more. That’s good news for homeowners, for whom growing prices equate to more equity, higher household wealth, and more financial flexibility—but it might be even better news for investors, as one company known as Point tries to turn home equity into something that a company can pour money into and make money out of.
Point’s concept is simple enough: The company wants to buy equity from homeowners. Such an arrangement would let homeowners tap into the equity accruing in their home, while skipping the onerous and sometimes more expensive option of getting the sort of equity loans provided by banks. “Imagine having money in a safe that you are not allowed access—instead, you must borrow the equivalent amount of money from a bank and pay the bank interest for the privilege. That is what homeowners face every day with the wealth tied up in their homes,” reads Point’s website. They want to change that by making the process of accessing home equity easier, faster, and more fair.
When using Point, a homeowner can go to the website, and input information about their home and their financial history. Point will then make them an offer to purchase usually between 5 and 15 percent of their home’s value. After additional screening including supplying more financial information and a home appraisal—at the expense of the homeowner—Point will charge homeowners a 3 percent processing fee and an escrow fee, and then provide them with the agreed upon loan amount.
In the grand scheme of housing-market issues—historically low ownership rates, high rental prices, down payment hurdles, and decreased affordability—the inefficiencies faced by owners who want to cash in on their equity doesn’t register as all that big of a problem. But Eoin Matthews, the company’s chief business officer and a co-founder argues that says that there’s reason to be concerned. Plenty of homeowners, he says, are trying to get equity loans in order to pay down more expensive forms of debt, or to bridge the gap during a rough patch. Prior to Point, they would be stuck trying to borrow from banks with less favorable terms, or would be forced to rely on more expensive, unsecured loan options if their application for a home equity loan was rejected due to stringent lending requirements. ”You have a lot of people with home equity and they just couldn't access that wealth. They are being turned down even though they had 50 percent or 60 percent equity in their home,” Matthews says. To the founders of Point, that’s a problem worth solving—and big investors would seem to agree. Last week, the company raised more than $8 million to expand its business.
The homeowners that Point works with fall loosely into three categories, Matthews told me: those with equity who want to draw on it to do something like fund a business, those who want to use equity to better their home through renovations, and those who need to use the equity in their homes to help improve their financial situation, usually to pay off other debt.
Here are the details of how Point will—or won’t—make money: If a house remains at the same value for the duration of the investment, the homeowner just got an interest-free 10-year equity line of credit. If the home depreciates, everyone loses, but Point doesn’t lose as much. If the house rises in value, the homeowner owes Point 20 percent of the overall increase, which could wind up being a pretty hefty chunk of change in exchange for a 10 percent cash advance. (Matthews insists that the staff of Point is incredibly upfront with homeowners about whether or not appreciation sharing will unfairly benefit the company.) As Matt Levine argues in Bloomberg, the upshot of all of this is that whether or not Point’s arrangement gives the bigger boost to investors or homeowners really depends on individual homeowners, or perhaps more aptly, individual houses.
In a sense, selling an equity stake in one’s home is a radical way of thinking about homeownership and how to utilize it to create financial opportunity, both for owners and investors. But in another sense, it’s also yet one more way of securitizing the housing market, a practice which—albeit in a much larger and more risky manner—has gotten the U.S. economy in a bunch of trouble before, with homeowners bearing much of the actual consequences. Does Point’s business contribute to the exact sort of opacity and complexity that can make the mortgage industry even riskier? Matthews doesn’t put stock in those concerns. The product and the process today, are among the more simple and straightforward mortgage-based products in an already complex financial field he says. “Investors who use the platform may try to securitize this, and that'll get more complicated, but I don't think our product is adding any complexity today,” he said. “It's adding an option for homeowners, which I always think is good.”
The ability to buy and then monetize homeownership is a concept Americans remain obsessed with. And understandably so: For a really long time the value of one’s home made up the bulk of one’s overall worth. Now a smaller share of Americans own homes, and many who do are more conservative with their handling of them—either out of rational concerns or fear. That means that even as the market strengthens, finding new ways of thinking about homeownership, particularly as a financial tool that could benefit both owners and investors, will remain a slow and scary process.