Wednesday, July 10, 2013

Who said you have to own 100% of your house?

Stuck in a 6.5% mortgage? Would like to refinance, but don't have sufficient equity in your home?  Welcome to the wonderful world of "financial innovation". You can do what some businesses do when they are in this situation: sell "shares" in your house to investors. The proceeds can reduce your mortgage amount, potentially allowing you to refinance or at least reduce your payments.

Alternatively, you want to buy a house but don't have 20% to put down? No worries - buy your house as a "joint venture" with investors. Who said you have to own 100% of your house in order to move in?

Who are these investors willing to co-own your house? Anyone who wants a piece of the housing market. This strange investment platform is called PRIMARQ (see overview below). When the house is sold and the bank is repaid, the investor and the "homeowner" share the proceeds. Investors can participate in specific neighborhoods or types of properties or invest in a diversified pool.

It's a levered bet on the housing market that has some incremental risks. If the house price declines to the point where there is little equity left, the homeowner has an even greater incentive to walk away than before. That's because the homeowner has given up some of the upside in the home to the investor. And the upside is sometimes the only thing that keeps homeowners from walking away - they believe they can eventually recoup some of their investment. With nobody living in the house and paying the mortgage, investor's options become limited. Investors will have the right of first refusal to purchase the property assuming it has any value after the mortgage is paid off. Primarq also has insurance products to provide some protection, but that eats into the returns. As one can imagine, liquidity in this type of investment is also a bit of an issue. While one investor can sell her holdings to another, only the homeowner decides when she wants to sell the house.

For those brave souls who believe the housing market will outperform other asset classes in the next few years, this is a "pure play" investment. Most people in the US however already have a large chunk of their net worth tied in this market, and incremental exposure could be unwise.
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