Shaky capital markets have stunted the growth of equity release deals, a financing product that competes with reverse mortgages and, to a lesser extent, home equity loans.
Equity releases, also known as shared-appreciation deals, let homeowners receive cash in exchange for a share of their home's future appreciation without having to make monthly payments. Real Estate Equity Exchange Inc., the best-known provider of this product, once served 15 states, but last month, citing funding problems, it stopped marketing its product or accepting applications. The San Francisco company, which does business as Rex & Co., is still completing deals for customers who applied before mid-October.
Its main competitor, EquityKey LLC, has also stopped funding new deals, though it is still accepting applications should it decide to return to the market.
The only company still funding new agreements is the newest entrant to the market: NestWorth Inc., which started making deals in September and serves the San Francisco Bay Area, Seattle, and Portland, Ore. Grander Financial Inc. of Irvine, Calif., which has resold Rex and EquityKey products, parted ways with Rex in August. Grander, which also arranges mortgage modifications and loans secured by customers' stock portfolios, once considered the Rex agreement it offered to be its flagship product, but now it says EquityKey's product is the least popular of its offerings.
"I would think anyone who's relying on institutional funding in the capital markets right now is having more problems than a company like ours, which is smaller and less reliant on the capital markets," said Graham Williams, NestWorth's president and chief executive. "We could clearly grow our business more quickly if the capital markets were functioning in a normal fashion, but at this stage in our development, the capital markets aren't necessary."
Even before the slowdown, this was a small niche. Rex said that it has made "tens of millions of dollars" of transactions, and that at its peak it received 5,000 to 10,000 customer inquiries a month. NestWorth has about $20 million of deals in the pipeline. By comparison, home equity loans outstanding climbed about 3% from a year earlier, to $1.1 trillion, according to the Federal Reserve.
According to the Department of Housing and Urban Development, production of federally insured reverse mortgages — the predominant product in that market — increased by about 4% in the fiscal year that ended Sept. 30, to 112,014 loans, after increasing more than 40% the previous year. (Reverse mortgages are typically counted in units, since it is not known at the time of origination what the ultimate dollar amount will be.)
Of course, the decline in home values means less equity to be extracted through any of these products. According to the Fed, total owners' equity in household real estate has dropped 11% since its peak last year, to $8.8 trillion on June 30 of this year.
"Shared-appreciation mortgages in various forms have been tried before, and they haven't traditionally done very well," said Keith Gumbinger, a vice president at the research firm HSH Associates.
For Rex and EquityKey, "not being able to grow at a time when other avenues for equity may be challenged … could certainly limit opportunities for them," he said.
Mr. Williams, who was Rex's chief operating officer until October 2007, said NestWorth relies on private investor pools and bank financing and is "very comfortable in our ability to continue through next year."
Rex has been more affected by the tight credit environment.
"Our institutional investors are uncertain and not making future commitments," said Tjarko Leifer, its managing director of marketing and strategy. "We simply felt it was prudent not to be able to engage new homeowners if we were unsure about our longer-term funding."
Rex stopped accepting new customers about a month after the federal government took over one of its investors, American International Group Inc., and a few days after another investor, Royal Bank of Scotland Group PLC, reportedly agreed to sell a majority stake to the U.K. government. Mr. Leifer said the two shareholders did not provide ongoing funding to Rex. "Our decisions are not directly related to what's going on with them. They had made an investment in us in the past, but there was no ongoing financial relationship." He says he expects to start accepting new customers again, but he would not say when that would happen. "We're a young company, relatively small," he said. "I think it's safe to say that this type of dislocation definitely affects our ability to stay in business."
EquityKey did not return calls for comment. Jason Jepson, a spokesman for Grander, said it is still offering EquityKey products but alerting customers up front that EquityKey is not funding new deals. Such deals normally have a lead time of 65 to 90 days before being funded, so the freeze has had little immediate effect on their popularity, he said. "Our EquityKey deals since August have gone up an average of 30% to 35% each month."
Like reverse loans, equity releases are marketed mostly to older consumers. EquityKey requires that applicants be at least 65. NestWorth requires that they be at least 60. Rex has no minimum age.