Home Equity Investments—A Primer

A Home Equity Investment (HEI) contract offers the homeowner an upfront cash payment in exchange for giving an Investor a stake in their property. The homeowner retains sole right of occupancy of the property and pays all upkeep and expenses during the term of the HEI, and the Originator participates in the value of the property when the contract is settled.

-- HEIs offer homeowners access to their homes' equity without taking out a loan. Similar to reverse mortgage loans, HEIs do not require monthly payments, and are settled in a lump sum, but unlike reverses, HEIs are available to homeowners of any age. In recent years as interest rates have climbed, reverse mortgage originations have declined (due in part to lower upfront advance amounts resulting from the higher interest rates).
-- HEI enables homeowners to consolidate debt, or finance remodeling/renovation projects and thereby increase the value of their homes. HEI proceeds used for home improvements, can create additional value for homeowners since HEI Originators typically do not share in any home value created generated by the home improvements.
-- The interest reserve in HEI transactions typically is size to cover four to six months of interest payments. If resolutions in a particular month was insufficient to cover interest, the reserve would be tapped, but replenished in future month with excess cash flow.

“Interest in this market is high and can be expected to continue growing, especially if interest rates remain high, and homeowner equity stays strong,” says Derek Moran, Senior Vice President. “Morningstar DBRS anticipates continued interest in the features of the HEI product as it is a diversified source of funds for homeowners, as well as an attractive source of returns and diversification for investors.”