When Ricardo and Catherine Soto were looking to buy a home in Chula Vista, they knew that even after selling their old house in El Cajon they would be able to afford a down payment of only about 10%.
But when buying a home, 20% is the magic number. It means not only borrowing less but also avoiding mortgage insurance, which can cost hundreds of dollars a month.
Some cash-strapped home buyers might have opted to tap a relative or retirement savings, but the Sotos tried something new. When they bought their home for $650,000 in September, the couple came up with the 20% after all — thanks to an unusual arrangement with a newcomer to the mass mortgage market.
Unison, a 12-year-old San Francisco company, offered to match the $65,000 that the Sotos brought to the table in exchange for what amounts to an ownership stake in their house.
The Sotos don't have to pay anything back — not for a while, at least. But when the couple sell their house they will owe Unison the $65,000 it invested, plus 35% of the value their home gains. Should the market suffer a setback, Unison will share in the loss.
The company, formerly called FirstREX, is one of a handful of firms developing novel financial products aimed at helping buyers afford increasingly expensive homes now that the market has recovered from last decade's housing bust.
Others, including San Francisco start-up Point, offer similar cash-for-equity arrangements for existing homeowners, but, for now, don't work with home buyers.
For the last few years, Unison has offered its down-payment product to buyers of pricey homes who need so-called jumbo mortgages. Now the company is going mass market.
It's working directly with mortgage lenders to offers its down-payment program to buyers looking for ordinary home loans. Government-backed mortgage agency Freddie Mac will purchase loans made to Unison customers through what the agency described as a "very limited pilot."
Unison's program could help some buyers get into homes they otherwise could not afford. But housing finance watchers don't see this as a return to the kind of high-risk lending that sparked last decade's financial crisis. Unison customers must have good credit, qualify for a standard mortgage and make at least a 10% down payment — much more than what's required for loans insured by the Federal Housing Administration, for instance.
Still, deals with Unison and other firms are novel and come with a big tradeoff: In exchange for a smaller mortgage, buyers give up a big chunk of the value their homes might gain.
Laurie Goodman, co-director of the housing policy finance center at research group Urban Institute, said it's important for home buyers to know what they're getting into.
"Saving money up front in exchange for a share of the upside is a legitimate decision, but it's one the buyer needs to fully understand," she said.
For the Sotos, the decision came down not to how much value their home might gain or lose, but the size of the monthly payment.
"For our personal situation, what was most critical was having access to discretionary income because our kids will be going on to college," said Ricardo Soto, 50, a father of three teenagers. "Having that lower payment and knowing I can count on that was really important."
Unison is working with four mortgage lenders, including Orange County's LoanDepot, one of the nation's largest mortgage originators, and it has deals with three more. Unison is already available to home buyers in California, New York and 11 other states, and will be available in eight more this year.
With tighter mortgage-lending standards, home prices near pre-recession highs and expensive rents making it difficult for would-be home buyers to save for a down payment, Unison co-Chief Executives Jim Riccitelli and Thomas Sponholtz say they think that there will be healthy demand for their down-payment program.
"It's harder than ever to buy a house right now," Riccitelli said. "Credit is still very hard to get."
They see demand not only from home buyers but from investors. Before founding Unison, Sponholtz worked for Barclays Global Investors, where he managed investments in bonds for pension funds, endowments and other institutions.
Those investors, he said, want to invest in the housing market. For pension funds especially, the cost of housing has a direct impact on how much they need to earn on their investments because housing is one of the biggest costs pensioners have to cover.
"Housing has an inherent appeal to an institutional investor," said John Kerrigan, chief investment officer for Santa Clara University, which has invested some of its endowment in Unison. "If housing declines, it is likely that the obligations of a pension or endowment have declined. And if housing is increasing it is likely that the obligations of a pension or endowment have also increased."
There are other ways to invest in the housing market, such as publicly traded companies that own apartments and single-family homes for rent. But those companies have to cover the cost of vacancies, maintenance and property management.
"What we do is offer pensions and endowments very pure exposure to home prices," Sponholtz said.
Here's how it works: Buyers have to qualify for a mortgage and be able to make a down payment of at least 10% on their own.
In a typical deal, Unison will match that 10% down payment, but the company will do smaller and larger deals. For example, it might match a 12.5% down payment, or put up as little as 5% if the buyer can put up more. Unison gets that money back, plus gains or losses, when the home is resold.
If homeowners haven't sold or don't want to sell after 30 years, they're obligated to get an appraisal of the house's value and cash Unison out, which could require taking out a home equity loan.
After the deal closes, the buyer takes possession of the house and is responsible for monthly mortgage payments, taxes, insurance and maintenance.
Unison's deals are structured as an option — that is, in exchange for help with the down payment, the company is buying the right to acquire a set percentage of the home at a later date.
"We don't technically own a piece of the house while the homeowner lives there — that's really important for the home buyer," Sponholtz said. "The home buyer maintains control of their home."
That means that, while Unison won't help pay property taxes, it also can't tell homeowners what kind of landscaping to put in or whether they should choose hardwood or carpet.
Chris Hart, chief executive of First California Mortgage, estimates that mortgages tied to Unison's down-payment program could eventually account for perhaps 10% of the purchase loans his Petaluma firm originates.
Ira Rheingold, executive director of the National Assn. of Consumer Advocates, said the program might be a good deal for some sophisticated buyers. But he worries that — like reverse mortgages and some specialty home loans that flourished during the housing boom — it will be marketed to customers who don't fully understand it.
He noted that, though Unison is not a lender, home buyers will eventually owe the company.
"It's not a bad idea. It's a good idea, as long as it's marketed to the small niche of people who it really works for," he said. "It's like reverse mortgages — they make sense for some people, but they're not for everybody."
Unison, which has assets of about $27 million, has done a few hundred deals, though only a handful through the new down-payment program.
Riccitelli and Sponholtz think that the market for their new offering is big, and that millions of home buyers could be interested, but they won't work with just anyone.
Before Unison agrees to invest, buyers have to meet with a Unison representative, listen to a presentation and pass an exam that asks 20 questions about how the program works.
The test goes over some of the basic math of a Unison transaction — how much the home buyer would owe Unison based on the gain or loss in the value of their home — as well as rules of the deal. Buyers can't rent out their home, for instance, and are responsible for covering broker fees and other costs of selling their property.
"We insist on having well-educated partners," Riccitelli said.
Ricardo Soto said he and his wife both passed the test "with flying colors," and they're comfortable with the deal they made.
If they later sell the house for $750,000, they would owe Unison $100,000 — the original $65,000 that the company invested plus $35,000.
Soto said he was initially skeptical about giving up that much upside. But then he remembered that the home his family sold in El Cajon didn't gain much value at all.
"Most of the equity we realized in our last home had to do with paying down the mortgage, not with appreciation," he said. "And I get to keep all the value I get by paying off the mortgage."
He also liked that Unison will share in the downside if home prices should fall — 35% of the decrease in value will be subtracted from what the couple owes the company.
And regardless of the ups and downs of the housing market, the Sotos are saving about $300 a month on their mortgage payment and an additional $400 because they don't need mortgage insurance.
An extra $700 a month is a big deal, he said, as his kids all start college over the next four years.
"I'm not planning 30 years out," he said. "I'm just hoping to get through the next eight."
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