"A nation of homeowners is unconquerable." -Franklin D. Roosevelt
NEW YORK (MainStreet)--Homeownership is a daunting, at times seemingly unattainable dream for many Americans--what with total student debt at $1 trillion, a national unemployment/underemployment rate at 14.3% and median household income dropping 7.8% since 2007. The average home price in the U.S. is a whopping $202,000, and the subprime mortgage crisis did nothing to quell anxiety. In fact, this year the American homeownership rate dropped to 65%, its lowest point since 1995.
But what if instead of taking out a mortgage from a bank you were able to go in with a number of investors and be the majority stake holder in the home equity?
That's the new system proposed by PRIMARQ, which is a capital market system that uses equity share finance to achieve two ends: first, to allow a person to become a homeowner of a property that otherwise would have been difficult or impossible to attain and second, to provide a platform whereby investors can gain exposure to the residential real estate asset class.
Whichever side of the equation you're on, this is a framework that is turning the housing market as we know it on its head.
If you don't have 20% to put down on your house, you can simply co-own your house with investors. Or, say you're stuck in a 6.5% mortgage but don't have enough home equity to refinance? You can sell shares in your home to investors and make your domicile a joint venture.
Essentially, the home occupant can supplement a down-payment or qualify for mortgage refinancing such that he doesn't have to put all of his liquidity in a single basket.
When the house is sold and the bank is paid back, the owner-occupant and the investors share the profits.
Simply put, it works like so:
- 1) A residential property for purchase or refinance is submitted onto the PRIMARQ exchange, packaged with third-party data and posted as an offering to the investor side of the market.
- 2) Investors bid on a "Q" position, (1Q = $10,000 purchase equity holding), and submit funds to escrow on acceptance of that bid.
- 3) Funds are present and financial contingencies associated with PRIMARQ are met. The loan is approved based on lower LTV and DTI ratios.
- 4)Escrow and closing honors current methodology and schedule and homeowner enjoys full occupancy and improvement rights.
- 5) Each investor enjoys appreciation and liquidity through access to the secondary market for Q trading.
Put another way, this is crowd-sourcing capital for your home.
In fact, twelve years ago, PRIMARQ CEO Steve Cinelli, a veteran of the banking world and private equity, founded Off-Road Capital, a crowd-funding site (a decade early) that leveraged the power of the Internet in capital formation--to connect those in need of funds with those in possession of them.
In 2010, he was looking for a different turn when he was in touch with his friend, an academic moving from the Midwest to the Bay Area, where prices are significantly higher. Cue the induced sticker shock. Though this particular professor couldn't afford to borrow money to have a nice place, Stanford actually has a program whereby the school helps professors by contributing equity to their purchase.
That was Cinelli's eureka moment--to bring that system to a mass market.
"My contention is let's build an equity market and allow investors to invest in a huge asset class and ride that performance," Cinelli said. "Our model is really to co-invest with someone who's got skin in the game--the owner-occupant."
The owner-occupant, by the same token, has the pride of ownership but, because he has equity partners, does not have to borrow so much. This creates a better framework for affordability.
"You need tens and tens of thousands of dollars to afford a down payment on a house, and suddenly, banks have pulled out of the market that would fund that purchase," said Sara Batterby, the chief marketing officer of PRIMARQ. "Homebuyers are in a tough spot. They can't access the marketplace."
Most mortgage applications are getting denied, and people are finding it difficult to marshal sufficient funds for a down payment. PRIMARQ allows consumers to solve today's housing finance problem with a more sustainable model that is less debt-reliant.
The investors benefit, too, as they get a "pure play" on the housing market with the opportunity to diversify across various properties and neighborhoods. An investor can sell his holdings to another investor and capitalize on price gains or hedge against a down market.
On the downside, if the house price declines such that there is nary any equity left, the homeowner is more likely to walk away as he has given away some of the upside in the home to the investor.
If the System's Broke, Fix It
The American dream of home ownership has concretely been a national aspiration since "Own Your Own Home Day," initiated in 1920, but the current U.S. homeownership rate of 65% puts us around number 20 in per capita homeownership around the world, behind countries like Russia, Greece, Italy and Bulgaria. Initially, Cinelli noted, we financed homes by putting up 50% and then borrowing a two-year loan for the other half. The construct of our housing market as we know it--where we put down a little and borrow the rest--was established during the New Deal days, with Presidents Franklin D. Roosevelt and Herbert Hoover and the FHL Bank System.
"And we certainly saw the effects of that debt," Cinelli said. Cue the country's housing market awash in underwater homes.
"The whole housing market is conditioned about availability of capital, because the price of homes requires outside money," Cinelli said. "And so it's really about the flexibility, the availability, the cost of that outside financing. My contention is that debt alone has run its course. Let's bring some prudence some reason to a market that's fundamentally broken."
To boot, the amortized loans over many years can have a borrower end up paying 2.5 to 3 times more than the purchase price. A $500,000 house in this scenario would run you about $1.6 million.
"We've created an environment where people have become indentured to housing finance," Cinelli said. "To me, that's completely imprudent."
But the housing market is a $16 trillion asset class, and financing debt is not the only option--though it has been the only offering for the last 90 odd years.
"This is a financial market, a capital market that is devoid of equity, but it needs equity," Cinelli said.
Real Estate Disruption
Real estate investment through the public market is yield-driven such as with REITs and limited partnerships. Though people are buying up commercial or multi-family housing, there hasn't been a broad-based product option where investors can get into single-family investments.
Equity share finance--the format offered by PRIMARQ-- has been used sporadically in real estate with community land trusts and low-income housing from public agencies to preserve affordability in particular areas. Major universities use this technique to recruit professors.
But residential real estate has been a single-investor, single-owner proposition because of the availability of debt. In some instances, all you'd need to put up is 2.5% and the Federal Housing Administration would guarantee the remaining 97.5%.
Cinelli pointed to the fact that in Islamic societies, interest (or "riba") is against the law and against the Koran. Instead, there's use of the profit-loss sharing whereby banks become co-owners and investors with homeowners. PRIMARQ mimics, to an extent, this concept but replaces banks with individual investors.
The After Effects
This new equity-side arrangement could ride the raft of the positive repercussions that increased home-ownership would bring.
"There's an echo factor," Cinelli said. "People who buy homes, invest in their homes--build a new picket fence, get appliances." But it's more than just investment in the home and the consumer-generated shot in the arm to the economy. Homeowners that have equity have improved monthly cash flows, and because they're not paying excessive interest rates, they have incremental money they can invest. Children growing up in a home their family owns are more likely to get advanced education, net higher-paying job and contribute to the economy as a whole in a more significant way.
"Think about the stimulus to the economy," Cinelli said. This system allows homeowners to retain liquidity and reduces the systemic risk in the financial markets to mortgage lenders and government agencies.
Down the line, the system can continue to pay dividends.
"If folks have a lot of equity in their home and a family is looking to fund education or seniors are looking to go into retirement, why not sell a piece?" Cinelli said.
Small businesses can even benefit. With the JOBS Act, there's been much chatter about ways to bring capital into small businesses, the engine of job creation. Those using PRIMARQ could access home equity by selling off shares instead of borrowing against the home from a home equity loan.
--Written by Ross Kenneth Urken for MainStreet