Home Equity Investments in Washington State: Predation or Opportunity?

• In Event: Home Equity and Wealth Building

Abstract

For most Americans, real property equity is derived from the value and possible appreciation of primary residences. As a result, much of the average household’s net worth is illiquid, and cannot easily be accessed or converted to cash. In response, lenders have developed a range of specialized, secured, and regulated loan products that homeowners may use to temporarily leverage their real property assets to cover other needs, such as home equity loans, home equity lines of credit, and reverse mortgages. In recent years, a new financial arrangement, Home Equity Investments (HEIs), has been increasingly used to help consumers access home equity.  As a new type of real estate agreement, HEIs are generally not regulated, which may expose consumers to additional risks and predatory practices.

First, we collected information from public records on deeds of trust that include HEI companies (Point, Unison, Hometap, Homepace, Splitero, and Unlock) in each of the six counties with most HESA agreements in the state (King, Pierce, Snohomish, Clark, Spokane, and Kitsap). We documented 2,040 deeds of trust across 984 census tracts. We find that although the share of homeowner occupied units that have ever entered an HEI agreement in Washington is low, the number of HEI agreements in the state has been increasing drastically since this product entered the market. 

Second, we merged data from public records to publicly available data from the American Community Survey. To better understand who the HESA consumers are, we use this novel dataset to assess the characteristics of residents of census tracts in which HESA agreements have been made. HESA products are expected to be used by consumers who do not qualify for a traditional mortgage product and need to tap into their home equity – in particular, low-income and/or older homeowners who may have few other options to access the value stored in their homes. In line with these expectations, the probability of having any HEI agreement in a census tract and the density of HEI agreements in the studied tracts are positively associated with the share of Hispanic, less educated, or older residents in the area. Yet, HEI agreements are also negatively correlated with the share of unemployed individuals and the share of poor families in a tract. 

Finally, to document the nuanced effects of Home Equity Investment (HEI) products on homeowners' financial security and overall wellbeing, we conducted 15 interviews with HEI consumers in Washington State. Our qualitative analysis reveals two distinct groups of consumers entering HEI agreements: those with limited options and little understanding of the product’s terms, and those who are more financially informed and able to strategically leverage the structure of HEIs. These two groups experience significantly different financial and mental health outcomes. Our findings highlight both the potential of HEIs to fill a critical gap in the market and the risk that, in a rapidly growing sector, many consumers who adopt these products may not be the ones best positioned to benefit from them.

Authors

• Mariana F Amorim, Washington State University
  Non-Presenting Co-Author

• Gregg Colburn, University of Washington
  Non-Presenting Co-Author

• Crystal C Hall, University of Washington
  Non-Presenting Co-Author

• Julia Karon, University of Washington
  Presenting Author

• Sharon N Kioko, University of Washington
  Non-Presenting Co-Author

• Xinyue Wu, Washington State University
  Non-Presenting Co-Author