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]

·       Homeowner retains the exclusive right to occupy the home and is responsible for the care and maintenance of the home, including property taxes, hazard insurance, and any other debt obligations secured by the home.

·       Homeowner bears all costs related to selling the home.

o   If the homeowner does not maintain the property to the standards required by the agreement, the settlement amount may increase at the time of payoff.

·       Home equity contract company secures its interest with a lien on the property, just as lenders do for traditional mortgages, potentially limiting the homeowner's ability to refinance their primary mortgage or take out new debt.

·       Consumers also pay origination fees and other closing costs when they get a home equity contract. 

The CFPB has stated that these "home equity contracts" or "home equity investments" are a form of credit and therefore subject to consumer protection laws. With respect to consumer protections, the CFPB has persuasively argued that these agreements are not simply investments and thus should be subject to the same regulations and disclosures as traditional mortgages. 

Potential Risks 

Based on research conducted by the CFPB,[v] here are a few potential risks for consumers. 

·       Shared equity contracts involve homeowners receiving upfront cash in exchange for a future repayment tied to the home's value.

·       Homeowners keep the right to live in the home but are responsible for its upkeep, taxes, and insurance.

·       Repayment is typically a lump sum due at the end of the contract (usually 10-30 years) or upon specific events, such as the sale of the home.

·       The repayment amount can be substantial and is calculated using a formula that typically results in a higher repayment than the initial payment, even without significant increases in home value.

·       The CFPB has identified potential risks, including higher costs compared to other home-secured financing options, complex disclosures, and the possibility of being forced to sell the home to repay the contract.

·       Consumer complaints highlight issues such as misunderstandings about repayment amounts, appraisal values, difficulties with refinancing, and being surprised that selling the home was the only repayment option. 

The CFPB advises consumers to carefully evaluate the potential risks and thoroughly understand the terms of shared equity mortgages before committing, as they can be a viable option for accessing home equity, particularly for those with low credit scores or limited income. 

shared equity loan structure 

Let's take this brief introduction to shared equity loans and expand it into a Pros and Cons format. First, I will present the foregoing outline more concisely and straightforwardly. 

A shared equity mortgage is a financing agreement where a borrower and a lender share ownership of a property. This arrangement allows homebuyers, especially first-time or low-income individuals, to afford a home they might not otherwise be able to purchase outright. 

Structurally, here's how it generally works: 

·       An investor (the lender) provides a portion of the down payment or a lump sum towards the purchase price in exchange for a percentage of the property's future equity.

·       The borrower takes out a smaller primary mortgage and makes monthly payments on that loan.

·       When the property is eventually sold, the investor receives their original contribution plus their agreed-upon percentage of any appreciation in the home's value. They also share in any losses if the property's value decreases.

·       The borrower can also benefit from better interest rates on their primary mortgage due to the larger down payment provided by the investor.

·       In some cases, shared government programs or non-profit organizations offer equity mortgages to promote affordable homeownership. 

Fannie Mae has provided its own eligibility criteria for shared equity loans. Loans originated in connection with the following shared equity programs are eligible for purchase by Fannie Mae: community land trusts, income and resale price restrictions, and limited or shared equity co-ops.[vi] 

Risks Associated with Share Equity Loans 

As I noted above, the Bureau also issued a Consumer Advisory on January 15, 2025. However, the CFPB has moved its webpage, so it appears to be currently unavailable. Nevertheless, my firm tracks all issuances from the CFPB and keeps them indefinitely. The following are the key concerns of the Consumer Advisory. 

·       Non-Standardized Disclosures: Home Equity Contracts (HECs) qua shared equity loans may lack the standard mortgage disclosures that allow consumers to compare options and understand the true cost of borrowing.

·       High and Unpredictable Costs: HECs can be significantly more expensive than traditional home-secured loans and often involve a large, unpredictable lump sum repayment based on the home's future value. This repayment amount can grow rapidly, sometimes at annual rates of 19.5% to 22% in the early years.

·       Risk of Losing Your Home: Homeowners unable to make the large, unpredictable repayment may be forced to sell their homes or face foreclosure.

·       Complexity and Lack of Transparency: HECs are complex financial contracts, and companies may market them deceptively, claiming they are not loans, thereby potentially bypassing consumer protections.

·       Restrictions on Home Use: Some HECs may impose restrictions on how homeowners can use their property, such as limiting their ability to rent it out or take out a traditional second mortgage.

·       Potential for Predatory Practices: Some consumer complaints reviewed by the CFPB describe experiences feeling frustrated, misled, and in some instances, even targeted by predatory practices.   

Pros and Cons 

From the above-outlined limited review, we can derive the following Pros and Cons. 

Pros 

·       Increased buying power

·       Potentially lower monthly mortgage payments

·       Easier qualification compared to traditional mortgages

·       The investor shares in losses if the property value declines 

Cons 

·       Reduced wealth-building potential for the homeowner

·       Potentially high costs if the property appreciates significantly

·       Limited eligibility requirements for some programs

·       Fewer options compared to traditional mortgages 

In effect, a homeowner receives a cash payment (the "investment") from a company in exchange for a portion of their home's future appreciation or equity. Typically, no interest or monthly payments are required, unlike traditional mortgages. So, there are no monthly interest payments or principal repayments during the term of the agreement. The homeowner settles up with the investor when the home is sold or at the end of the agreement term. 

From the investor's point of view, they receive a portion of the home's appreciation or equity when the homeowner sells the property or at the end of the agreement term, which is typically between 10 and 30 years. From the consumer's point of view, shared equity mortgages can be attractive to homeowners who need cash upfront but may not qualify for traditional loans, or those who want to avoid interest payments.

Jonathan Foxx, PhD, MBA
Chairman & Managing Director
Lenders Compliance Group

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[i] Home Equity Contracts: Market Overview, Issue Spotlight, Office of Mortgage Markets, January 15, 2025, Consumer Financial Protection Bureau

[ii] Angela Roberts v. Unlock Partnership Solutions AOI, Inc., ETAL,  US District Court, New Jersey, January 15, 2025, Amicus Brief of the Consumer Financial Protection Bureau. No. 1:24-cv-1374 (D.N.J.) The amicus brief filed by the CFPB does not have any binding effect, and the US District Court for the District of New Jersey, which is hearing the Roberts case, may not agree with the CFPB’s views. The CFPB filed a Motion to Withdraw its amicus brief on March 17, 2025.

[iii] Idem

[iv] Aspire HEI, Pricing calculator, https://aspirehei.com/pricing

[v] Op. cit. i

[vi] Shared Equity Overview, B5.3-01, Fannie Mae Seller/Servicer Guide (2.5.25)