New down payment option could boost homeownership
This is the first time a 'shared-equity' program with no interest payments has been approved by a federal mortgage agency
- Freddie Mac is piloting a program that lets homebuyers get half of a 20 percent down payment covered by a financial firm (Unison Home Ownership Investors) in exchange for home equity.
- Twenty Unison-boosted loans have closed so far, with 10 going to first-time buyers, but lenders expect to generate "thousands" over the next few years.
The down payment assistance comes from Unison Home Ownership Investors (formerly First Rex) — a San Francisco-based firm that invests in homes alongside owner-occupant buyers and lets homeowners sell home equity for cash.
How the program works
Participating borrowers can fork over a 10-percent down payment and end up with the same monthly mortgage bill as borrowers who use their own money to cover the full 20 percent for the same loan but don’t use the program.
In exchange for covering half of a down payment, Unison Home Ownership Investors will realize part of the gain or loss of a home’s value — with the payout (or loss) likely usually occurring when the property sells in the future. Borrowers do not pay any interest on a down payment contribution from Unison.
The program marks the first time that a “shared-equity” scheme that involves no interest payments has been approved by a federal mortgage agency, according to Unison and some industry insiders.
That sets mortgages with investor-supported down payments up for widespread use if Freddie Mac expands the experiment.
Mortgages with Unison assistance don’t require private mortgage insurance (PMI) because they use a 20-percent down payment. Freddie Mac holds these loans to the same underwriting standards as mortgages that use a 20-percent down payment covered in full by the borrower (with no assistance from an investor).
Borrowers can buy out Unison Home Ownership Investors’ stake in their property after a few years, or they can let the company hang on to the equity for up to 30 years. At that point, they would have to buy out Unison by refinancing or selling.
Unison’s flagship product covers half of a 20 percent down payment in exchange for a 35 percent share of the loss or gain in a property’s value once Unison’s stake is paid off.
Case study: $200k increase in buying power
One couple working with Ross Armstrong, a Realtor with Berkshire Hathaway California Properties, used the product to increase their buying power by more than $200,000, Armstrong said.
They bought a $1.05 million home in Newport Beach, California, before the property hit the market, he said.
“These particular clients — they both had great jobs; they both had great incomes, but their history and credit was not so great,” said Armstrong.
The Unison assistance “got them the house, got them the location they wanted, and without it, we were struggling,” he said. “It definitely filled a void and allowed [the couple] to do what they wanted to do.”
First Cal’s participation
First Cal (also known as “First California Mortgage Company”) is one of seven lenders originating Unison-assisted mortgages with the approval of Freddie Mac. The lender is marketing Unison down payment-assistance to borrowers in the Washington, D.C. area and parts of California and Washington state.
“It’s become, I will say, a major part of our value proposition … to our Realtor partners” and homebuyers, said First Cal Chief Operating Officer Joe McKone. “We’re doing lunch-and-learns with Realtors throughout the country.”
One first-time buyer took out a Unison-boosted mortgage from FirstCal to buy a Maryland home for $689,000 — likely at least $75,000 more than he could have afforded otherwise, McKone said.
The buyer, a well-educated, young professional, now saves more than $1,000 a month on his monthly mortgage bill compared to what he used to pay in rent, according to McKone.
He earns a high income, McKone said, but struggled to save for a down payment due to student debt.
“I can only assume he didn’t have rich parents to help him buy this house,” McKone said.
The approval process for a Unison-assisted mortgage from First Cal could work like this:
1. A real estate agent tells a client about Unison down payment assistance and directs the client to First Cal.
2. First Cal decides if a property the client is interested in qualifies for the program (Unison assistance is only available for single-family homes and eligibility depends on market conditions).
3. First Cal approves a client for the loan based on the same underwriting standards it would use for any borrower that applies for a traditional mortgage with a 20-percent down payment sponsored by Freddie Mac.
“[We] spend about three to maybe five days max in the pre-approval process to make sure that the borrower is qualified for the property, and then when they write the contract, we’ve already got the loan information started, so we can still close that transaction within the designated terms of the contract, typically within 30 days,” McKone said, speaking of working with buyers who use Unison down payment assistance.
How far has the program gone?
Only 20 Unison-boosted loans have closed so far, with 10 going to first-time buyers, according to Unison spokesman Michael Micheletti.
But Unison Co-CEO James Riccitelli expects lenders will originate thousands over the next year.
McKone said he hopes 10 percent of First Cal’s mortgage originations over the next year will include down payment help from Unison. First Cal churns out around 500 mortgages a month, more than 50 percent of which are used to buy homes, he said.
“In every market where this program is available, my retail loan officers are highly engaged in the process of educating consumers, so they know that we’re going into a purchase market knowing that [refinancings] are going away as a result of the [mortgage] rate environment,” he said of filling borrowers in on the option to get down payment help from Unison.
Freddie Mac spokeswoman Lisa Tibbitts said the Unison program is a “limited pilot offering” that “will certainly not be a huge volume by definition.”
“Typically, we don’t give out a lot of information about pilot projects because we look at them as learning opportunities,” she said, declining to provide further details.
Consumer mortgages with down payment contributions for home equity aren’t new. They’ve existed since at least as far back as the 1980s.
But their providers often collected interest payments and only shared in property value appreciation — not loss.
Unison’s product appears to break new ground because it doesn’t come with any interest; most crucially, it can be used with mortgages that are sponsored by Freddie Mac; and the capital for the down payment assistance purportedly comes from pension funds and endowments.
A number of startups have tried to bring a version of Unison’s product to market over the last few years.
For a 2013 article on one such company, PRIMARQ, Freddie Mac told Inman that it would only buy shared-equity mortgages for owner-occupant homebuyers if the investor was an individual — not a partnership or any other kind of legal entity.
Freddie Mac’s partnership with Unison suggests the firm has made an exception to this requirement.