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Readers are no doubt familiar with the phrase “house rich and cash poor,” referring to the many Americans who have seen their property values soar so much that they joke that they wouldn’t be able to buy their current house if they were shopping today. How to monetize that equity? Up to now, the only real avenues were either a) take out a home equity loan, on which you pay interest, or b) sell (There’s actually a third option known as “reverse mortgages,” which is largely marketed to retirees, but critics say the fees are often too high).
Now there’s another way, but once again, there are critics who question whether this is a good deal or not. Equity Exchange will give consumers cash representing up to 15% of their home’s value in exchange for a cut of up to 52.5% of the capital appreciation when the property is sold. The San Francisco startup gets 3.5% of the gains for every 1% it pays the consumer for the option. One critic notes that this gives Equity Exchange 50% of the capital gains for just 15% of the house. But executives at Rex note that they also share in any potential downside as well, which isn’t the case with originators of reverse mortgages. Investment News has a good read on the latest wrinkle in real estate finance.
BusinessWeek editors Chris Palmeri, Prashant Gopal and Peter Coy chronicle the highs and lows of the housing and mortgage markets on their Hot Property blog. In print and online, the Hot Property team first wrote about the potential downside of lenders pushing riskier, "option ARM" mortgages and the rise in mortgage fraud back in 2005—well ahead of many other media outlets. In 2008, Hot Property bloggers finished #1 in a ranking of the world's top 100 "most powerful property people" by the British real estate website Global edge. Hot Property was named among the 25 most influential real estate blogs of 2007 by Inman News.