The recent interest rate hikes from the Federal Reserve have driven the cost of traditional mortgages up significantly, with average 30-year fixed refinances reaching 5.36% from just north of 3.5% in January.
However, the real estate market shows no signs of significant cooling in the face of the Fed’s recent changes, with many metro areas moving from expensive to unaffordable, especially for those underserved by the traditional lending institutions.
When combined with the economic impact of the COVID-19 pandemic, homeowners — especially Black, Latino and other communities of color — have sought to address pressing financial problems by accessing their increased home equity.
Ashley Bete, an experienced finance, real estate and technology entrepreneur who also spent time with Credit Suisse’s Technology Group and held technology leadership roles with Cantor Fitzgerald and Nasdaq OMX, has a solution. His firm, Leap Analytics, provides Home Equity Agreements (HEAs) that allow homeowners to convert equity into cash without incurring additional debt through a HELOC or refinance.
Leap focuses on helping homeowners in underserved communities achieve financial wellness through education and utilize their home equity to ease debt loads, according to the firm’s website.
Digital Wealth News spoke with Bete to discuss this new financial tool, the technology that powers his approach and what’s next in the red-hot real estate space.
- What is a HEA, and what does it do for homeowners?
A Home Equity Agreement (HEA), is an agreement between a homeowner and an institutional investor. The homeowner receives a lump-sum cash payment and in return, the investor receives an equity stake in the homeowner’s home for a fixed term. An HEA is not a loan, there is no debt and the homeowner does not make monthly payments to the investor. An HEA does give homeowners cash based on the equity in their homes to build a business, pay for an unexpected expense or address pressing financial concerns. Our business model works with our clients to use these resources responsibly to improve their creditworthiness and support future financial wellness.
- How do HEA providers make money?
HEA investors make money in the home’s appreciation over the term of the agreement. As the home appreciates, the investor’s equity stake in the home appreciates along with the homeowner’s. This is a win-win for homeowners as they can access the value of their home before a traditional liquidity event, such as selling the house and without taking on more debt, through a second mortgage.
- According to your website, you use AI to help eliminate potential bias in the home equity access market. Can you describe how this process works?
We have a data-driven solution that leverages AI and machine learning to effectively assess a borrower’s credit risk and resiliency, by analyzing a borrower’s ability and willingness to pay.
Traditional credit scoring methods inaccurately classify millions of borrowers as non-prime, thereby excluding these borrowers from many consumer finance products. Our technology corrects this.
We use national property, valuation, lien, lender, demographic and contact databases to inform our AI-enabled technology to review HEA prospects based upon a much wider range of data than other selection systems. Traditional FICO scores, which have unfairly excluded underserved people from obtaining prime credit for decades, aren’t a primary factor for HEA eligibility. This levels the playing field and enables the inclusion of homeowners historically left behind by mortgage and debt industries.
- Are there potential synergies for established real estate investors within this emerging market? What kind of technology are you using to facilitate these opportunities?
As this is a developing market, the opportunities to work with real estate investors are only just beginning to emerge. HEAs make a great alternative to construction and bridge loans for active, “buy to sell” real estate investors. HEAs can be an attractive and tax-friendly equity extraction or diversification tool for traditional rental property investors.
Real estate investors can use short–term HEAs with annual interest rate of return caps versus traditional, more expensive financing options to finance upgrades or to simply leverage the value of the property.
Because HEAs are real estate contracts and not debt, investors make no monthly payments and the HEAs don’t weigh on an investor’s ability to borrow or purchase additional properties. In addition, The investor may claim a capital loss for the cost of the HEA financing once the HEA has ended.
- We’ve seen massive corrections in recent weeks and perhaps the start of a bear market. Does this kind of shift in the equity markets mean there may be a cooling of the real estate market and thus increase the risks associated with HEAs?
Real Estate values in the Case Shiller Top 20 Metropolitan Areas are verging on unaffordable to nearly any new buyer. On the other hand, this incredible appreciation has created trillions in home equity wealth for existing homeowners. This increased value provides a housing market risk buffer that didn’t exist in 2006. However, we believe that house price appreciation will cool, by 2% to 4% per year, giving wages a chance to catch up with housing valuation and make houses more affordable to more people.
This cooling trend provides HEA institutional investors with risk-adjusted returns much greater than owning entire rental houses or investing in mortgage debt. Even if house prices were to decline, HEAs have built-in downside protection for institutional investors in which a home would have to lose over 25% of its value before putting investor capital at risk.