Home Equity Sharing Agreements: Should They Be Regulated Like Mortgages?

Now and then at Deeds.com, we alert our readers to the vital importance of guarding a home’s equity. There are risks involved with any agreement that would place a lien on a deed.

One way to leverage home equity we’ve talked about is the home equity investment, a.k.a. HEI or home equity sharing. Companies offering this model include Hometap, Unlock Technologies, Point, Splitero, and others.

The deed holder gets a lump sum, usually in a few weeks. The lender will get a piece of the home’s future appreciation. With no monthly payments to be made, it might look like a good alternative to other forms of home equity borrowing.

But lately, concerns have arisen.

What Could Possibly Go Wrong?

Home equity investors are the parties on the other side of these agreements. The firms in the middle give the deed holder a lump sum of cash in return for creating shares out of a home’s future value.

What can a borrower do with the lump sum of cash?

A borrower might want to: 

• Deal with a financial emergency or just pay off credit card debt.

• Help the kids buy a home, go to college, or start careers.  

• Put money down on a second home or an investment property.

• Start a business.

And so forth. The application does not take long and can be done online. (A minimum credit score is needed.) The home equity sharing agreement involves no monthly payments. So, the borrower can meet goals faster than they could if they had an extra monthly repayment to make. There’s a caveat here, though, because the borrower can’t go out and spend with wild abandon. Most home equity sharing agreements direct the deed holder to keep a certain level of equity in the home.   

But the firms offer quick access to funds—with no monthly payments and no impact on a person’s debt-to-income ratio—if a deed holder will give the company a stake in their home’s value.

If that value drops, the deed holder will owe less at the end. The investors will be unable to take profits. But given how long the terms of these agreements extend (usually 10 years, but some are as long as 30), assume the property value will rise by the contract’s end.

And that means…

Deed Holders Need to Be Aware of the Risks

And there are several.  

The origination fee on the home equity sharing agreement can be as high as 5% of what the deed holder borrows.

The borrower pays fees for an appraisal and inspection, and for recording the lien, setting up escrow, taxes, and title insurance. Expect payoff fees and reconveyance servicing fees at the end of the term. At that final stage, the HEI firm wants all the money it lent out, plus a chunk of the rise in property value.

What could possibly go wrong?

A lot, of course—especially if the property gains a good deal of value by the end of the term (or when the deed holder dies, sells, or refinances). Many people can be expected to exhaust their savings when it’s time to pay the investors. And some really ugly scenarios have played out. Some deed holders have landed in bankruptcy courts.

What Do the Laws Say About Home Equity Sharing?

Some states take a hands-off approach to the HEI model, treating the concept like any other investment risk. Some states haven’t taken notice of the model yet. But some state legislatures and courts have weighed in.

• Connecticut regulates the agreements as mortgage loans. Maryland, too, requires home equity sharing agreement providers to be licensed mortgage lenders. And, as of last year, the Illinois Residential Mortgage License Act applies to “shared appreciation agreements.”

• In contrast, California courts have decided against regulating HEIs under the state mortgage laws.

• In Colorado, a deed holder facing bankruptcy argued that an equity sharing agreement was actually a mortgage loan. A court agreed to hear claims of unconscionability and unfair lending practices.

• The Massachusetts attorney general has filed a legal action against HEIs under mortgage lending and consumer protection statutes.

And all eyes are now on Washington state—where the Ninth Circuit is weighing in. Let’s take a look.

If It Acts Like a Mortgage…

Seven years ago in Washington state, a couple accepted a lump sum of about $65K. In return, they agreed to give up 70% of their home’s equity. Generally, the firm’s practice is to demand repayment of the cash advance as long as property values don’t sink more than 25%.

The firm has advertised its agreements as “no debt” and “no interest.” It tells potential borrowers that the funds do not constitute a mortgage loan.

A federal court disagrees.

Under Washington’s Reverse Mortgage Act, says the Ninth Circuit, the firm is indeed creating mortgage loans. A “shared-appreciation reverse mortgage” is what the judges are calling the equity sharing agreement.

The court also believes the advertising statements could mislead potential borrowers.

A rehearing is coming up. Meanwhile…

Lawmaking in Process: Pennsylvania

Home equity investment products are being marketed on social media. A consumer advocate in Franklin Park, Pennsylvania, named Wendy Gilch encountered HEI marketing on TikTok. She brought it to the attention of lawmakers. Since then, the legislature has looked into cases where deed holders are being forced to share most of their home equity with investors.

Now, Pennsylvania may pass House Bill 2120 and regulate the HEI model as a loan product. The proposed law would curb foreclosures, windfalls to investors, and appraisal methods that undervalue homes up front.

HEI firms characterize what they offer as investments. There’s no stated interest rate, so they’re not loans and shouldn’t be regulated as loans, they say. True: there’s no fixed interest rate. But if there were, at least the borrowers would know what they’re getting into. With home equity sharing, who knows how much value a deed holder will have—and be expected to share—in a decade or more?

Pennsylvania’s bill is one we’ll be watching.

Equity Sharing Agreements Are Likely Here to Stay

While most deed holders know about home equity loans (HELs), home equity lines of credit (HELOCs), and cash-out refinances, the HEI model is fairly new. As long as investors believe real estate values are bound to keep rising, it will be in demand.

Deed holders, too, are showing interest. Entrepreneurs may be especially intrigued by the relatively easy application process and criteria.  

And now, with regulation beginning to take hold, the model could become mainstream. Pennsylvania is poised to become the latest state to regulate these agreements.