Fractionalizing Home Equity | Hacker News Reader

Fractionalizing Home Equity

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My feeling about this is that there's a significant risk of predatory behavior, hard for individual homeowners to protect themselves from an aggressive company.

I don't personally know the Patch Homes guys, and I hope they'll behave ethically.

This is a pretty terrible deal for the homeowner. They're selling a call option that is $X in-the-money. This is worth that $X, plus a premium for the optionality involved. Then there's the counterparty risk, where you're obligated to a variable lump-sum expense in ten years at a valuation under the control of the entity you've contracted with (and based on the initial valuation, also under that control).

So who gets to hold the title? The home owner or does it change hand when they extract some equity? If not the owner, how do they ensure the get their cut? liens? How do they make sure the home owner doesn't extract equity multiple times from different groups? What if a life changing event happens that changes the plan of the owner from wanting to sell on the agreed date and they want to stay for a few more years? Will they be forced to sell? What if the market tanks and the house is underwater? Too many ways this can go kaput. IMO, keep things simply stupid. Don't mess with your home equity. It's not an ATM.

Apparently it's a call option on x% of the equity of your house expiring in 10 years. You are short 1 call contract but receive the premium upfront. If you sell your house before 10 years, you have to buy back the call option from Patch the company (more or less than you received depending on how the value changed).

Say you use Patch for your 1MM house, then sell it for 1.5MM 8 years later. You will be on the hook for 23%[1] or $345k.

As a homeowner, you're not really selling any equity, just a derivative based on your house's equity. If you don't sell by 10 years, I assume Patch the company can foreclose on your house if you can't deliver in cash 23% of your house's appraised value (how else would this be investable otherwise?).

The only way to be short is to own a house. But once these contracts are securitized, it's one derivative away from becoming shortable without owning the underlying (house). I'm sure investors taking the other side of these contracts will want insurance. Then you're back to synthetic CDOs.

I really hope this doesn't take off.

[1] https://www.patchhomes.com/how-patch-works

I like the concept...but think I'd rather have a 1:1 title than financial engineering shenanigans tbh.

Interesting concept. I'm curious if it would happen for other assets in the long run (cars, boats, etc.) Financing has seeped its way into everything.

wasn't converting Americans' homes into spooky financial instruments one of the big reasons for the collapse?

This doesnt sound spooky to me, you have to own the housw before you can sell the upside option. Meaning you already have paid your house loan. Very niche product, mainly for old people.

FTA: "Patch even covered three months of an owner’s mortgage during a liquidity crunch for his small business"

That doesn't sound paid-off to me.

How does this compare to a home equity loan?

A traditional home equity loan only allows the lender to receive at maximum the principal + interest.

This thing allows the "lender" to receive an unlimited profit because the lender receives a percentage of the house's value regardless of how high it goes.

> What Patch offers instead is to take a piece of your home equity (currently limited to $250k maximum) and sell the upside on it to a investment fund.

Sometimes I can't help but feel that we deserve what's coming.

What's wrong with something like that? Ok, selling the upside might be stupid, but it also might make sense in some situations. I dont think this product will be wildly succesful and change a lot of things, just a niche thing.

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