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The industry has spent the past year focusing on the lock-in effect, a term used to describe a subset of would-be sellers stymied by the record-low interest rates they secured a few years ago. While this subset of owners is simply sitting on their golden goose, a 19-page white paper published Tuesday revealed another side effect of rollercoaster rates.
The paper, which is a joint effort between EasyKnock, Next Belt Strategies and Duke University’s Fintech program, said volatile rate fluctuations have prevented more than 9 million homeowners from effectively accessing the equity in their homes.
Roughly half of this cohort have mortgage rates above 6 percent and lacked the credit to refinance when rates dropped in mid-2020. The other half is mortgage-free; however, they also lack the credit and income to qualify for home equity loans, leaving them to weigh the risk of selling and then buying or renting in a higher-cost market.
Marvin Chang | Credit: LinkedIn
“Our housing finance system in the U.S. is not built for flexibility or optionality, and we have found that over 1 in 9 homeowners find themselves in situations that leave them boxed-in,” Duke University Executive in Residence Marvin Chang said in a prepared statement. “The American homeowner should have a similar toolkit available to other asset owners: debt, equity products, bridge products, transitional solutions and arbitrage products.”
“As technology and our financial markets have become more sophisticated, innovative products have become more accessible directly to consumers,” he added. “It is time for lenders and banks to extend this trend to homeowners.”
Chang and his co-author, Next Belt Strategies founder Jeremy Potter, pointed to the sale-leaseback model as the primary solution for “boxed-in homeowners” outside of selling to an individual seller or institutional investor, entering into a home equity investment agreement, or turning to a private lender.
“The residential sale-leaseback is a non-lending product intended to address temporary life events,” the paper read. “Though the sale-leaseback is not a new product, the sale-leaseback with an option to buy back the home at the original sale price is a market innovation.”
The sale-leaseback model enables homeowners to sell their home to a company and receive a portion of their equity in cash. From there, the homeowner will usually sign a 12-month lease, with the option to extend the lease, repurchase the home, or sell it on the open market. Each company has specific terms a homeowner must follow.
Although several companies offer sale-leaseback options, the white paper focused on market leader EasyKnock. Potter and Chang said EasyKnock’s Sell & Stay program enables owners to use their equity to handle short-term financial issues without sacrificing their long-term financial health.
Jeremy Potter | Credit: LinkedIn
“As the number of homeowners who fit the ‘boxed-in’ category continues to grow, the need for access to more flexible tools that address liquidity increases,” Potter said in a written statement.
The Sell & Stay program enables homeowners to sell their homes to EasyKnock. The sale includes flat processing (4.99 percent) and closing cost (~1.5 percent) fees and annual option fees that range from 1 percent to 5 percent. The option fees go toward the second transaction, whether the owner decides to repurchase or sell to a new buyer.
After closing, the owner will receive 75 percent of their home’s appraised price, while EasyKnock holds on to 25 percent. From there, the owner will be able to lease their home for up to five years.
If they repurchase the home, owners get access to the 25 percent of equity EasyKnock held onto plus appreciation. If they sell it, the owner will receive the net cash proceeds (i.e., sale price minus option exercise price, fees and expenses).
The duo addressed several criticisms of the model, including the fact that sale-leaseback providers enable owners to use homes as ATMs, turn homeowners into renters, and that homeowners don’t truly understand the model.
Potter and Chang said home equity loans and sale-leasebacks achieve the same outcome as allowing homeowners to access equity; however, sale-leaseback products come with fewer hurdles and fees and no interest rates.
“There typically are no other solutions to access bona fide home equity outside of higher interest consumer debt like credit cards, personal loans or home equity purchase agreements,” the paper read. “Surely, stacking debt on debt is a worse outcome than sale-leaseback with buyback terms.”
“Boxed-in homeowners need an actual pressure release valve allowing the time to use the remaining tools in the current system to repair credit and decide what comes next like [selling] or [saving] to rebuy their home,” it added.
Regarding the loss of homeownership status, the paper said the majority of homeowners who turn to sale-leaseback models are heading toward foreclosure or considering selling their home. Sale-leasebacks, they said, allow them to financially recover while having a clear path back to owning their home.
“The sale-leaseback provides an opportunity to preserve the ability to own the same home again and therefore ultimately stay in the home,” the paper read. “The Boxed-in homeowner does not have to decide between sell today or foreclosure tomorrow. [They] can lease today and determine when or if to sell in the future.”
Lastly, Potter and Chang said all financial products — including mortgages and home equity loans — come with some level of confusion for the average homeowner. However, that confusion can be mitigated by slowing the transaction process and giving homeowners time to shop around and understand the full range of their options.
“Despite voluminous and in-depth disclosures throughout the mortgage and mortgage servicing processes, consumers continue to struggle with basic mortgage and mortgage servicing knowledge,” they said. “By comparison, the sale-leaseback lends itself to deal-specific explanations, cash summaries and explainer videos.”
Although the paper focused on sale-leasebacks, the duo said fintech leaders are working on developing a wider range of options that can effectively serve this group of homeowners, including fair equity-based products and new, more flexible loan servicing options.
“Counterintuitively, flexibility and alternative paths bring less risk and more stability to the market overall,” the paper ended. “Recognizing and addressing the needs of this community is essential to ensure equitable access to housing finance and to prevent further entrenchment of housing inequality.”
