A few Colorado home buyers are testing a new approach to making down payments in a state where the average price of a new home has soared to over $550,000.
If the pilot project proves successful, buyers – as well as existing owners looking to gain access to their homes’ equity – will be able to tap large pools of institutional capital to get into the housing market, finance home improvements like solar panels and use the appreciation in housing values to meet their expenses. All without the need to make the monthly payments that are required for home-equity loans or other forms of second mortgages.
The catch: They will give up a portion of their upside gains if their homes increase in value.
Homium, a New York-based digital home equity lender, is putting a new twist on “shared appreciation,” with a product that allows existing homeowners who have built up equity in their homes to unlock it without the debt service payments typically associated with such loans.
In the case of a first-time homebuyer who has yet to build up home equity, Homium offers a fixed 35% shared-appreciation note that can act as down-payment assistance and lower their mortgage payments. First-loss capital from foundations will be used to cover mortgage insurance for the note.
Homium has closed eight deals in Colorado, deploying interest-free shared-appreciation mortgage loans at $50,000 apiece on homes that have an average value of $475,000. That’s about 10% of their current home value in exchange for the same amount of the home’s future appreciation.
“By the end of the month we’ll have made around 18-20 loans for around $1 million before we add Utah, California and other states,” says Homium’s David Jette.
Homium plans a broader US rollout via a loan fund of up to $350 million that will offer homeowners and buyers, particularly Black, Latine and low and middle-income families, access to its shared-appreciation loans. The fund has raised $16 million to make loans ranging on average between $30,000 and $300,000.
“We want to put a billion dollars towards homeownership in the next 12 months and we can unlock that billion in home financing with just around $300 million of capital,” Jette told ImpactAlpha. “With the median home price in the US at $400,000, you’re talking about 2,000 homes, which would make a huge dent, especially in target communities where you’re talking about uplifting families for generations.”
Institutional asset class
Shared-appreciation notes can trade immediate benefits for long-term costs. As home values rise, so does the value of the equity slice that homeowners have sold. Considered as a whole, the cost of that capital can be so high that issuers of such home-equity loans risk running afoul of state anti-usury laws.
Homium’s investors see an opportunity to support homeownership and build wealth for the middle class. “Homeownership is the foundation of financial security for most Americans,” said Jim Sorenson of Sorenson Impact Group, which backed Homium’s $10 million Series A raise in April.
Homium, he told ImpactAlpha, “is really an important development [in] the whole pyramid of passive wealth building that most people are left out of.”
Homium’s goal is to securitize the shared-appreciation loans and sell the bundles to public and corporate pensions, insurance companies, banks and asset managers, and other institutional investors that have CRA credit requirements and a focus on ESG.
“For the first-time, institutions can invest side-by-side with homeowners, doing well and while doing good,” said Homium’s Tommy Mercein. “So it’s a benign partnership between the capital provider and homeowner, where their interests are aligned and the deal never changes.”
Homium has partnered with Securitize, a tokenization platform for real assets, to offer the tokenized home equity product to investors. Through Securitize, investors receive a tokenized asset tracking the price appreciation of a pool of shared-appreciation mortgage loans in real time.
“The process is very low fee for the investor and takes all of the friction out of the model,” says Jette. Also, these are “investors that have an impetus to hold and create more impetus to hold and create these more permanent funds with this interest, knowing that the harvest of these notes is gonna take 10-15 years for everything to materialize.”
Cracking the code
With rising home prices, the average mortgage-holding homeowner in the US is sitting on nearly $300,000 in equity, of which $193,000 is tappable and could be withdrawn while retaining 20% equity in the home as a cushion.
Until recently, refinancing was a common way to access home equity, but that strategy has become less appealing with high mortgage interest rates. Taking out a second mortgage is growing in popularity as an alternative.
“For homeowners who don’t qualify for a second mortgage or have a rich uncle, which disproportionately would include lower-income and BIPOC populations, Homium offers a way to bridge the gap when life happens,” says Matt Eldridge of Realize Impact, an investor in Homium.
Homium’s shared-appreciation notes aims to help homeowners tap into their home equity without incurring monthly payments or trapping them in unfavorable financial agreements. With other alternative solutions, such as reverse mortgages, the homeowner also doesn’t incur monthly debt, but the borrowing costs can be too costly, particularly for low-income families.
Homium offers its fully-digital product on Avalanche, a Singapore-based smart contracts and blockchain platform, to lower transaction costs. It works with traditional loan originators like Guild Mortgage and community development financial institutions, or CDFIs, as well as dowpayment assistance and government housing programs, to offer its shared-appreciation note to homeowners.
Upon refinancing or selling, borrowers pay back the loan based on the new sale price. If the home loses value during the life of the loan, the borrower simply repays the principal.
“We’re not the only people making appreciation investments in homes,” says Jette, “but we think we’ve cracked the code on how to do it big by standardizing it, by building something that lots of different affinity and community groups can tap into and use for different cases.”
