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In a program that it plans to expand nationwide to employees at other companies, online mortgage lender Better Mortgage is letting Amazon employees pledge their stock in the company as collateral for a down payment when buying a home or when refinancing their existing mortgage.
Many of the best and fastest growing companies reward their employees with equity rather than cash, Better founder and CEO Vishal Garg said of the thinking behind Better’s new Equity Unlocker program.
By letting Amazon employees put up their Amazon shares as collateral, they don’t have to sell them or take out a costly margin loan to come up with a down payment, Better says.
Vishal Garg
“Even though equity is a valuable asset, it is considered ineligible by most banks and financial institutions when calculating the necessary down payment on a home,” Garg said in a statement Tuesday. “Today, we are very excited to announce that we have created Equity Unlocker to help Amazon employees unlock their equity, their homes, and their futures.”
The catch is that borrowers will pay a higher interest rate — 0.25 to 2.5 percentage points higher than what they’d pay for a conventional loan backed by Fannie Mae, Better says.
And since the shares serve as collateral for the loan, Better has the right to confiscate them if borrowers default on their mortgages — or seize the proceeds if the borrowers try to sell them before paying off their mortgages.
“If the pledged equity is exchanged for cash or securities of another party without the consent of Better Mortgage, Better Mortgage may, at its sole option, foreclose on those proceeds,” Better warns in the program’s terms and conditions.
The Equity Unlocker program is available for loans of up to $3 million on primary residences or second homes and up to $2 million on investment properties.
Better will value a prospective borrowers’ Amazon shares when the home they’re borrowing against is appraised, allowing them to lock in a rate. To qualify, borrowers must have a minimum FICO score of 680 and put up collateral equal to a 20 percent down payment.
But because Better discounts the value of the borrower’s shares by 50 percent, that means they’ll have to pledge shares valued at about 40 percent of the loan. A homebuyer seeking a $100,000 down payment to purchase a $500,000 home would need to pledge $200,000 in Amazon stock to qualify, for example.
On the plus side, the program is “non-mark-to-market and non-recourse,” meaning that the terms of the loan won’t change with the stock market. In other words, if the value of Amazon’s shares declines by more than 50 percent, borrowers won’t be required to put up more collateral.
In some respects, Better’s Equity Unlocker resembles a “crypto mortgage” rolled out last year by Milo Credit LLC, which lets homebuyers use their bitcoin holdings as collateral instead of cashing them in. But Milo does require borrowers to pledge more collateral if the value of the digital currency they’ve pledged drops by more than 65 percent.
Citing a Schwab survey, Better said 43 percent of millennials have exercised or sold equity compensation. For now, the Equity Unlocker program is only available to current and former Amazon employees on properties located in New York, Washington and Florida. But Better says it plans to roll out the service in 26 additional states by the end of June, and “ultimately plans to make Equity Unlocker available nationwide to employees of other public and private companies, offering millions of hard working Americans the flexibility to leverage their vested shares for all of their home ownership needs.”
During the pandemic-fueled refinancing boom, Better’s payroll peaked at 11,500 workers of whom close to 90 percent are gone after the company laid off thousands to cut costs. According to the Nationwide Multistate Licensing System, Better subsidiary Better Mortgage sponsors 132 mortgage loan originators, down from 1,444 last March.
With a deadline for taking his company public looming, last month at Inman Connect New York, Garg announced a new “One Day Mortgage” product which the company says provides qualified borrowers with a conditional approval letter within 24 hours.
Better Holdco — the parent company of Better Mortgage Corp., Better Real Estate LLC, Better Settlement Services LLC and Better Cover LLC — has until Sept. 30 to close a merger with a special purpose acquisition company (SPAC), Aurora Acquisition Corp.
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