Shared Equity Loans – Pros and Cons

QUESTION 

I am a mortgage broker in northern California. It's just me and my husband. In the last few months, several clients have come to me for a shared equity mortgage. I admit, I didn't know too much about them in the past, but all of a sudden, people want them. The more I look into them, the more I think they can really hurt my clients in the long run. 

There are some lenders who have pitched us on offering these shared equity loans. However, we haven't done them yet. We provide other second lien options to our clients. But one client is now insisting on it, even after I told her about the way she could lose in the long run. I know she's desperate for money and will do anything. If we don't give her a shared equity loan, she's going to another broker to get it. 

Maybe you have an opinion about share equity loans. We use your Brokers Compliance Group on the hourly plan, and you've been so helpful to us. So, we've got the compliance angle covered. But we need your straight talk on the consequences of the shared equity loan. 

What are some consequences of a shared equity loan? 

SOLUTION 

HEC Tune-up® 

(Home Equity Contracts)

RESPONSE 

Just prior to the advent of the new Administration, on January 15, 2025, the CFPB published an overview entitled Home Equity Contracts: Market Overview.[i] 

In that outline, the CFPB offers the following definition:

Home equity contracts are financial agreements in which a homeowner gets an upfront cash payment from a company and, in exchange, must repay a lump sum amount in the future that is based, in part, on their home's value. These contracts are often called "home equity investments" (HEIs), "home equity agreements," or "shared equity agreements." 

Shared equity mortgages are sometimes confused with shared appreciation mortgages. While both involve a lender benefiting from home appreciation, in a shared equity mortgage, the lender actually owns a portion of the property, whereas in a shared appreciation mortgage, the lender simply receives a share of the appreciation upon sale or refinancing.

 The CFPB first publicly addressed home equity contracts in the January 2025 issuance cited above, when it took three coordinated actions related to them. These actions included filing an amicus brief, issuing a consumer advisory, and publishing a market overview. While not binding, these actions signaled the CFPB's interest in monitoring and potentially regulating contracts of this type. 

Specifically, on January 15, 2025, the CFPB: 

·       Filed an amicus brief: In Roberts v. Unlock Partnership Solutions AOI, Inc.,[ii] a case involving a home equity agreement.

·       Issued a consumer advisory: Warning consumers about the risks associated with home equity investment contracts.

·       Published an issue spotlight: Providing a market overview of home equity contracts.

 

Share Equity Loan Arrangement 

Here's a brief synopsis of the CFPB's example of a shared equity arrangement:[iii] 

·       Homeowners typically repay the home equity contract company with a single large payment, often referred to as the "repayment amount" or "settlement amount."

·       Repayment is due by the end of the term (usually 10 to 30 years) or upon a triggering event, such as when the homeowner sells the home.

o   Example: Homeowner gets a $50,000 upfront cash payment:

§  After three years, the homeowner repays between $68,045 (if the home depreciated by an average of 1% per year) and $71,538 (if the home appreciated by any amount).

§  If the homeowner waits the full 30 years, the estimated repayment amount ranges from $25,183 (if the home depreciates by an average 1% per year) to $831,000 (if the home appreciates by an average 5% per year).[iv]