If you liked credit-default swaps and sub-prime mortgages, you're gonna love home-equity investments. It's a long article, so I'm just going to quote the section that's a simple explainer "Point" is the name of the company offering this "investment." I cannot see any way of this working out as a positive for anyone other than the big corporations. (And then, only after massive government bailouts.)
Thanks Joe Biden, the senator from MBNA who has fought against any regulation of the real estate and banking industry for his entire career. Yes, Trump could probably use such engineering by hiring people to tell him how to do it, but engineer this shit he cannot do. Tell us all again how Trump is worse than Joe when Joe has been the engineer and power behind these things. Trump did not go around congress getting support for deregulation for the banker overlords playing with the real estate economy and predatory investments. That was Joe while he was smiling and telling you all how much he is working for you and protecting you.
Home equity loans and "reverse mortgages" such have been around for ever, haven't they? I remember seeing commercials for them as a kid.
This is a fascinating financial product. It really drives home how fake home equity is, and how basically none of the appreciation is due to the owner, except, ironically enough, for situations like the example used in this story. 65% sounds like a lot of upside lost, but if you’re like Schumer, and you use that cash to pay for improvements before selling, it could be worth it. Schumer would not have put $60k into his property without this. Point caps the annual return at 17%, so with the 16% discount (which is, frankly, exorbitant), he basically gets all but an additional 1% on the sale, if he sells the same year he took the investment. It’s not clear if the $295k is the appraised value or Point’s discounted value. If the latter, he’s in great shape, but I doubt it. Breaking it down as an investment, the terms are somewhat unclear. But near as I can tell, it’s a $275,000 asset with a $122,000 senior secured loan against it. Which effectively means that $122k is irrelevant. So it’s effectively $153k. Point is offering a $60k investment for 65% of the appreciation in that $275k, but with a 16% discount and 17% per annum cap (I wish the article was a bit more specific as to just what the cap applied to; I can’t make the numbers add up there such that $20k ($80k-$60k) is 17% of any apparently relevant difference). There’s clearly a 1x liquidation preference. Without the per annum cap, no one in their right mind would take this deal. With it, it’s not a terrible idea if you put it into home improvements, preferably slow to depreciate ones, and/or ones that drive up neighborhood-wide property values, like better fencing, solar panels, sidewalk repair, new roof, etc. I don’t think Schumer here is getting screwed, and I think the possible macroeconomic damage is limited because these aren’t on banks’ books as loans.
I'd be willing to lay money that he's going to be shafted. I believe that this is what those in the financial sector refer to as a "Red Flag." Something else to consider: What's the source of the appraised value? Is it the tax assessment? An appraiser hired by the finance company? If there's a dispute over the appraisal, how is it settled? I'm guessing arbitration, and in general, that doesn't go well for the little guy. But notice how they're pitching the loans. They're not merely saying, "Use this for a home improvement." They're also talking about using it for things like paying for your kids' education and "unexpected medical expenses." Dude in the story is in his sixties, even with Medicare (and that's a state-administered program using Federal tax dollars, so just because it doesn't bleed people dry in one state, doesn't mean it won't bleed them dry in another) he's potentially looking to have to cough up a lot of money for medical treatments in the near future. Also, didja notice that he lives in Pensacola, FL? It's getting harder and harder for people to get homeowners insurance in FL. Not really sure why. Certainly can't be the whole global warming nonsense and the state being hit with hurricanes on the regular. You ever read Robert Asprin's "Another Fine Myth" series? There's a great line in the books, "If you think you got a good deal from a demon, then you obviously didn't read the fine print." Financial companies are pretty demonic, if you ask me. Right, and wasn't the whole idea behind Credit Default Swaps and Securitized Mortgage Investments (you know, the sliced-and-diced subprime mortgages that had been sold and resold a kajillion times) that since you were only getting a small portion of any particular mortgage, it didn't matter if a couple of folks defaulted on their mortgages, you'd still be able to make money, since the others wouldn't? That turned out well, didn't it? But, let me grant the idea that if someone signs up for one of these things, they're restricted in how they use the money, and it can only be used for things that would objectively improve the value of the home. So, yes to things like more efficient appliances and HVAC systems, and no to things like a swimming pool or a vacation to Maui. If you've got a home that hasn't had its HVAC system replaced since Clinton was in his first term, then putting in a new system is an absolute plus when it comes to the value of your home. However, if you live in FL, and your home is at a higher risk of damage due to global warming, so it's harder for you to find a buyer (or someone willing to loan you money to pay off this "home-equity investment"), which means that you're fucked. Oh, sure, the news article (and no doubt the story pitched to potential customers) is that the investment firm can't come after you, if through no fault of your own, the value of your property falls despite your efforts to increase it. That is never how these things work out over the long term. Because, sooner or later, someone decides that they need the line go up more, and then even folks who were utterly responsible in how they manage their finances can find themselves wholly, and completely fucked, due to circumstances beyond their control. I am speaking from experience here. I moved into this beer can in Nov of '99, and with what I was making, I could easily afford the lot rent and the mortgage on it. I also only had a 10-year mortgage, so it wasn't like I had to worry about covering that tab over 30 years. I could handle a few "bumps" with no problems. And, hey, when I saw that my employer in late '00 and early '01 was going through the same kinds of death spirals that one of my previous employers had gone through a couple of years before I started, not only did I have more education under my belt, I was able to walk into a new job without a loss in pay. Perfect, right? Well, except for the fact that my new employer turned out to be a religious nutter and the whole 9/11 thing happening that caused me to be laid off a short time later. I'll skip the details, but suffice it to say, that while I had some rough patches from then until the Great Recession, I didn't have to worry about being homeless. Then it became a very near thing that I only avoided due to modest help from a family member, the fact that I'd gotten a bit ahead on my mortgage so it was paid off exactly 15 years ago this month, and an understanding landlord. If we'd have seen the same kind of economic growth in this area during those 15 years, that we've seen since ~2020, I might not still have a hardscrabble life but that's largely out of my control. Spare me your notions of how economics are supposed to work, and just focus on the fact that the article profiles someone who lives in a state that's about to get flooded due to global warming and is old enough that expensive medical procedures are a near certainty (not to mention that the average life expectancy in Red States is around 66 years, just two years from his current age). If that ain't the loudest air raid siren you've ever heard going off, I don't know what to tell you.
This is a Business Insider article, not a prospectus, let alone a contract. I’m sure the terms are, in fact, perfectly clear, but I can’t evaluate them properly without details. Important questions, but I think if the answers were one-sided, the article would have said so. These are not really arguments more against this than against any sort of home-backed financial product in Florida, including mortgages and insurance. I didn’t ask you. But it is telling that BI didn’t publish any of the missing terms, I think. And I think it’s entirely possible not to get a good deal and also not get screwed. You’re making (what would be, in a different regulatory environment than actually exists) a better argument against mortgages than against this product. There’s no income stream attached to this. As far as selling it goes, it can be thought of as a zero-coupon callable bond with asset-backed recourse at a particular time and an uncertain amount of interest, albeit one with extremely low seniority since it’s not actually a bond. These aren’t good for potential buyers that need predictable cash flow. That drastically limits the market for these investments. Once again, a better argument against mortgages than against this. At least with this, you’ll likely be dead at the end, having had more consumable income in the meantime, and the lack of house is Point’s problem, not yours. The way you get screwed with this is if you can’t make insurance payments (because insurance companies pull out) allowing Point to force a sale at a low price. This is mitigated by Point losing out on all its upside, so they don’t really want to do that. Florida is probably the worst place to do this, but that’s true of all real estate investment, and people aren’t exactly fleeing for the hills (though they probably should be). BATNA on a mortgage in Florida is someone renting somewhere else, and neither party wants to miss out on the other side of the that. That that’s based on not marking down future values to account for climate change impact risk (assuming that’s what’s going on; I’m no expert in Florida real estate) is the real problem. Your hand-wringing over this new financial product feels really misplaced compared to that, or to its impact on more conventional mortgages. Thank you for proving my point: the problem is not marking down due to future climate change risk, not the existence of this particular investment product. You would have been screwed but for external help. And that was with a mortgage, not this. Clearly the problem is not the financial product itself.
As the local lord and master of tldr I must inform you people that you are using my primary power and must immediately hail Tererune or trim your posts down to 144 characters. I am getting tired of you fucking people using my powers freely without any respect for word walls and text dumps. Plus it is going to make @We Are Borg and @Ten Lubak start bitching, so thank you for properly having a conversation that hurts their tweeters.
