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Finding Flexibility for the Boxed-In Homeowner

Executive Summary v. 01-23-24 – Link to White paper
By Marvin Chang, Executive in Residence, Duke University and Jeremy Potter, Founder, Next Belt Strategies LLC

Introduction

Much ink has been spilled on how a sizable chunk of American homeowners have, in essence, become Locked-In to their homes.  We would like to shed light on another group of homeowners, trapped not by low-rate golden handcuffs, but by our increasingly inflexible housing finance system exacerbated by their own changing financial tides.  According to our estimates, over nine (9) million homeowners face barriers in accessing their own home equity.  This cohort, which includes retirees, those in the gig economy with variable incomes, as well as working-aged homeowners with sub-600 credit scores, face a common problem - their homes have left them Boxed-In with few options to leverage their home equity. The homes have become barriers instead of springboards to financial wellness.

Composition of the Boxed-In Community

Homeowners with mortgages

• Low Credit Scores (<600): This group, approximately 2.5 million strong, struggles to refinance or secure home equity loans due to sub-par credit scores.

• Long-term 6%+ Mortgages: About 3 million homeowners have older vintage mortgages with high interest rates, having been unable to qualify for prior refinancings.

Homeowners without mortgages

• Low Credit Scores (<600): Around 1 million homeowners have qualification challenges akin to their mortgaged counterparts unable to access their home equity.

• Age 45+ without Sufficient/Stable Income: Numbering over 4 million, these homeowners are unable to meet the underwriting requirements for home equity products.

Collectively, this Boxed-In population of over nine (9) million homeowners suggests a substantial product-market mismatch with its members unable to transition to new life stages or access their home equity for financial improvement.  Moreover, by reducing mobility, this deepens the housing supply/demand imbalance that we have been experiencing generally.

Challenges Facing Boxed-In Homeowners

1. Conventional Financial Products Inaccessible: The Boxed-In cannot meet the underwriting requirements for conventional mortgages and home equity loans stemming from factors like low credit scores, unstable income, and insufficient employment history.

2. High Cost of Alternative Financial Products: Non-Qualified Mortgage (“QM”) and hard money loans present an alternative but at a much higher cost and shorter terms, aggravating the financial strain on these homeowners.

3. Limited Loan Modification Options: While loan modification can reduce monthly payments, they generally do not provide access to accumulated home equity.  

4. Complications in Home Sales: Selling the home, while unlocking equity, comes with its own set of challenges and emotional tolls, particularly when driven by financial distress.  It’s also far from a quick solution.

 What Flexibility Could Look Like for the Boxed-In

The American homeowner should have a similar toolkit available to other asset owners - debt, equity products, bridge products, transitional solutions, and arbitrage products.  As technology and our financial markets have become more sophisticated, innovative products have become more accessible directly to consumers.  It is time for lenders and banks to extend this trend to homeowners. 

Homeowners should be able to access their home equity without increasing their debt burden, without paying punitive portions of their equity to access the capital markets and without having to leave their home.

As new products such as shared equity agreements still seek market equilibrium, one concept has been designed as a transitional solution for Boxed-In homeowners - the Sale-Leaseback program with Buy-Back option.

The Sale-Leaseback Concept and EasyKnock

The Sale-Leaseback program with Buy-Back option allows homeowners to sell their property and then lease it back, providing immediate liquidity while retaining the option to repurchase their home in the future.  This non-lending product is tailored to address transitional life events and financial hardships, offering a way out for those in such challenging situations - flexibility without dependence on traditional loan products.

Key features include:

• Purchase Contract: Transfers ownership from the homeowner to a real estate company.

• Lease Agreement: Establishes the tenant's responsibilities and terms.

• Option Contract: Provides a potential buy-back option at an agreed-upon sale price.

EasyKnock's Sell & Stay program exemplifies this concept. Once customers sell their homes to EasyKnock, they quickly receive a significant portion of the sale price in cash, and enter into a lease agreement with EasyKnock as landlord assuming responsibilty for upkeep.  The program also includes a buy-back option which, unlike shared equity agreements, lacks an equity component.  This means that equity appreciation incurred during the leaseback period will solely benefit the customer if s/he exercises the buy-back option.

This model offers a balance of timely financial relief and the potential to regain home- ownership, crucial factors for many who are emotionally and financially invested in their homes.  

Conclusion

The Boxed-In homeowner community represents a significant portion of the American housing market yet faces distinct challenges not adequately addressed by traditional financial products. Their situation requires innovative solutions focused on flexibility, including: the Sale-Leaseback with Buy-Back Option, fair Equity-based products, and new more flexible loan servicing options.  Counterintuitively, flexibility and alternative paths bring less risk and more stability to the market overall. Recognizing and addressing the needs of this community is essential to ensure equitable access to housing finance and to prevent further entrenchment of housing inequality.

To learn more about the authors, click links below.