Mortgage and Lending

The folks at IAC (NASDAQ:IACI) broke into five different companies this week with the real estate and mortgage related assets now under the umbrella of a company called Tree.com (NASDAQ:TREE) Is escaping from the conglomerate goo going to help this group prosper? Tree ostensibly has a bunch of internet properties but from where I sit, only two are viable, ahem, branches- LendingTree.com and RealEstate.com.




The former is the web 1.0 mortgage holdover with traffic now supported by TV ads. The latter a straightforward real estate broker with simply the best domain name in the business. The rest of the properties are a collection of, shall I say, unimpressive lending and home-search affiliate web sites.



Needless to say, being a volume mortgage player is a scary business right now. Maybe the secondary markets recover enough to support this model on-going, maybe, um, not. According to their S-1, Tree has limited exposure to the subprime and Alt-A mess. Surprising that they escaped that temptation that hit the etrades, etc. so hard. Good for them.

What does Tree have to offer? As a web site, RealEstate.com is decent enough to get a solid stream of leads by virtue of being many home searchers' very first stop on the internet. (Evidenced by the steady 800k visitors/month). The domain name is a built-in low-cost marketing channel for a brokerage. A really nice asset for sales and to recruit agents (the real business of brokerages). Is it enough? The site risks getting walloped by innovation happening in the intensely competitive home search space. (see Trulia, Estately, Redfin, Roost, Zillow, heck even Realtor.com is lumbering more quickly these days.) The big question for the future of this unit is whether the technology costs of keeping competitive continue to remain cheaper than traditional marketing channels for brokers.

Of Tree's lesser brands, I identify with the business proposition of Improvenet - home contractors and service guys need a better way to be found). But the competition with craigslist has to be brutal. And Angie's List is starting to run away with the premium end of the contractor referral market.

The bottom line for TREE is this: in the internet real estate space, it's a tough time to be an incumbent and a great time to be an innovator. Tree, despite the new name, is the incumbent.

[disclosure: we have realtor clients in the RealEstate.com brokerage and like all our clients we sincerely hope they kick ass.]

I always appreciate Brad Inman's perspective as a consummate real estate insider who is without obligation to cheerlead (like, ahem, some) and an entrenched market leader with the cojones to embrace change. Brad nails it today with 10 predictions for the next phase of the housing bubble burst. Here's a few:

• Exotic loans of any kind will be completely out of favor, leaving many borrowers and many properties unfundable.
• Home sellers will become active lenders, but only those who have equity. Seller financing will help some transactions.
• Second homes, expensive houses and certain types of investment property will be penalized and difficult to fund.

Read the whole piece.

My friend Jeff, the Xbroker, finally launched RateSpeed.com a couple weeks ago. This is a project he's been working on for several years, a personal crusade to clean up the mortgage brokering business. Jeff gave me a demo the last month, and I've since referred multiple people-real, live home buyers and re-financers, to the site. I've been meaning to blog about the site for a while, and I'm now here to say, RateSpeed rocks. The site is incredibly useful for finding current mortgage rates and understanding what they cost.
RateSpeed's model is very simple: they source mortgage rate data from tons of originators, and feed that information back to you. They've done it with three characteristics shockingly rare in the mortgage world.

1. You don't have to give up anything but an email address.
2. Any RateSpeed affiliate broker has to fix and publish their fees. The system doesn't allow for the-no-fees-but-we-gouge-you-on-the-rate-spread and other opaque pricing nastiness the industry is so famous for. What you see is what you get.
3. The presentation of available mortgage products each with their costs and benefits is so straightforward, you can actually be making informed mortgage decisions in just a few seconds.

RateSpeed licenses the platform to mortgage brokers. In exchange, Brokers get an incredibly powerful marketing tool for their site - if I'm any gauge, consumers will gladly give up an email address to see the most current rates and a real, transparent picture of costs.

How cool is that?

Two very cool announcements today from Friends of Altos - both are great examples of real estate data helping people make better decisions in this crazy housing market. I just love this kind of innovation.

Krunching.com

First up is Krunching.com: These guys built an investor-focused site with tons of data about properties for sale, investor metrics, property analysis. You can tell it was built by real estate investors answering their own property analysis questions. The site is super-fast and really pretty (in a web 2.0 sense.)

If you're an investor, Krunching is going to be a powerful tool for you. They're taking a freemium business model - they give away a bunch of great data for free and their power users sign up for paid services. They've built Altos local real estate data and analysis into their premium services, so if you don't buy from us, you can get our data in your Krunching subscriptions. My only complaint is that they've used an OFHEO regional chart on their investment summary page. The feds are telling us what happened to home prices in September. Thanks guys. (Hey Brian - you need an AltosChart on that page! Get with the program!) Krunching is only available in California right now, but it's a great start for a national product. Great job guys.

Homethinking Mortgage

Also launched today is a really cool mortgage market analysis product from longtime Altos partner Homethinking.com. I get questions every day from people trying to understand the scope of the mortgage crisis. The Homethinking guys have taken a huge pile of mortgage data and presented it in a super-clean, very powerful visual interface. Want to know how much exposure your town has to sub-prime loans? Homethinking will tell you. Want to know what percent of mortgage applicants are rejected? Check it out. Huge amounts of information in here. Again, thanks to the feds, this data is a year old. Still, it's better information than the world had access to yesterday. So kudos to Niki and team at Homethinking. Looks fantastic. And it comes in cool embeddable widgets!

I did a bunch of press calls last week and they all had one question in common: Everyone wants to know if it's a good time to buy.

Our BusinessWeek article from Friday carries the theme:

Where some see despair, others see hope. Sellers, who were once clinging to boom-time expectations, are trimming asking prices. But the news isn't all bad for buyers. In fact, for some the timing couldn't be better. The lower prices—at least in some markets—are making homes affordable for first-time home buyers and more attractive for investors on the lookout for fire-sale discounts.

Prices are down so much, there must be bargains, right?

Well, yes. But don't kid yourself. Getting a steal on a great property is NOT a slam dunk.

Glenn Kelman at Redfin has an excellent post on the challenges involved with mining for bargains in short sales, foreclosures, and other distressed properties. (aside: Glenn's Redfin corporate blog is consistently cogent and entertaining. If you're at all interested in real estate or startups, you should read it.)

Some of our Wall Street clients are well-financed funds that buy distressed mortgages from the banks. In many cases they're actually taking ownership of hundreds of properties every month. Guess what. As a buyer looking for a bargain, these guys are your competition.

So what's the recipe for investing in this market?

1. Be well-financed. In fact, be over-financed. Even good-credit first-timers are having trouble getting loans this spring. But if you're a well capitalized investor with a solid loan-to-value portfolio and a good relationship with your lender, you have a strategic advantage right now.
2. Build insider channels. Chances are if you're only driving around on weekends, you're going to miss the deals. You'll need to augment your search with other avenues, like foreclosure auctions or even direct lender relationships, to truly capitalize on the opportunities. Kelman points out that Redfin's buyers making offers on short sale properties are only succeeding at a 15% rate. Remember that you're competing against professional investors and specialized Wall Street firms for these deals. Also know that these specialized firms don't really want to be long-term owners, so the opportunity occurs when you work directly with them.
   
3. Do your homework. Know your market and your strategy. How are you finding the property? Where are you going to find them? Has your realtor handled many? Is she already selling some? You already know Altos for market analysis, but there are lots of excellent investment analysis websites (some marvelous Altos partners include Deedquest.com and InvestmentRiches.com, check them out.)
4. Be persistent. There's no question the bargains are out there. But your bid on a short sale or foreclosure will be subject to lender approval. (Kris Berg did a great illustration of the trend San Diego.) That means if you're aiming for a bargain, some of your offers will be getting rejected. That means you'll have to keep shopping.
5. Hope against large-scale bailouts. Every government deal aimed at helping owners ironically hurts buyers. You can argue right or wrong, but if you're a buyer, bailouts shrink your opportunity.

In short, bargain shopping for homes is like any bargain hunting. It takes insight and perseverance. It takes relationships. And above all it takes the financial wherewithal to capitalize when the opportunity strikes. Good luck.

Ed Glaeser in yesterday's Boston Globe lays out an excellent argument on the right approach for handling the foreclosure crisis. Though he's more lenient than I'd be.

There are winners and losers in both booms and busts. Owners, who win during booms and lose during busts, get the most attention. We often ignore prospective home buyers, who lose just as much as owners gain during booms and gain just as much as owners lose during busts.
Moreover, housing cycles don't pose huge risks to most homeowners, whose longer time horizons enable them to sit out downturns.

Despite his opening position, Glaeser seems a little more apt to "bail out" the overstretched homeowner than I can imagine. He doesn't sympathize with the speculators, but where do the speculators end and an honest redistribution recipient begin? Assuming you figure that out, I suppose, then spread some tax money around. But it's the passel of legislative "fixes" scare the daylights out of me. As Glaeser points out:

The current proposal for the Federal Housing Administration to increase its refinancing of troubled mortgages is an example of honest redistribution.

...

By contrast, there is little to like about the proposal to give bankruptcy judges the power to rewrite mortgage terms.

Let's be clear here: telling lenders after the fact that their lending terms are subject to bureaucratic whims is akin to Chavez nationalizing oil. It might feel good in the short term, but it the long term, the wells will run dry.

Here's hoping we avoid the overzealous legislators "fixing" us into oblivion.

The Times points out today that some New York lawmakers are proposing legislation to prohibit mortgage foreclosures for a year.

Portfolio Magazine's Felix Salmon describes it as "too early." I'll describe it as "insane."

Look, if I'm a lender, and I can't rely on my ability to collect the collateral against which the loans are made, do you really think I'll keep lending? Next thing you know the legislators will be trying to compel me to lend.

Look out below.

Felix pointed out the strength in the Altos Manhattan Condo Index. We haven't yet started publishing the New York real estate data on our free research page, so I'll have to dig in manually to get the goodies on the rest of the area.

[trivial aside: I was the anonymous source of the visual details of the U2 concert described in the first paragraph of this article in the inaugural Conde Nast Portfolio magazine last year.]

Been getting a few requests about our opinion on the various proposes economic stimulus packages in the works - including sharply reduced short term rates, and some kind of tax relief. How will they impact the housing market? Are we seeing any psychological impact already?

First things first: Are we in recession already? Is a recession inevitable?

From where we sit, the current-recession answer is, No, it doesn't appear so. Slowdown, yes. But exports are strong with the weak dollar, and there other signs of okay-ness out there. Gonna be hard to avoid one before the end of the year though.

Here's my favorite way to look at recession probability. The folks at ECRI publish a weekly leading economic indicator (WLI). In several decades they've not missed a recession call and have had no false-positives. This data is good.

What's this chart tell us? This data leads the economy by 6-9 months. ECRI looks for the Three P's of drop in its economic statistics before it calls a recession. Pronounced (check), persistent (check), pervasive (allllmost).

We're in the danger zone here, which is why immediate monetary (interest rates) and fiscal (taxes, etc) stimulus might just work.

Where does the housing market fall into all this?

We know that the real estate market is generally lousy. But really, really low mortgage rates mean that you can lock in affordability, if you have the credit. From Bloomberg:

For a long time, our worst case scenario here at Altos has been recession plus high interest rates. We've avoided that so far. As a result the pain in the housing market is most pronounced at the margins: Overstretched, with weak credit. New home construction. Here's what I mean.

So the weakness, while felt across the spectrum, is most acutely painful at the low-end of the market. That implies that a deep recession with it's job loss and income uncertainty is what it'll take to knock the final leg of the stool out from under the the rest of the market.

Conclusion: stimulate away, Uncle Sam, and do it quick.

The Journal today shows off its peerless graphic design team with a fantastic illustration of the past three years of subprime mortgage lending.

The accompanying article reveals little that the bubblistas haven't been crowing about for years, but a few bits bear repeating here. The first reiterates my view that the housing market correction has many years before recovery.

The data also show that some of the worst excesses of the subprime binge continued well into 2006, suggesting that the pain could last through next year and beyond, especially if housing prices remain sluggish. Some borrowers may not run into trouble for years.

[As an aside, am I the only one who noticed how many of this year's Inc. Magazine 500 fastest growing companies were mortgage lenders?]

The second gets to a less commonly asked question about the whole subprime blowup--who really is the "victim" here? Does anyone really deserved to be bailed out by the feds?

Last September, Darla Ball, a printer and copier saleswoman, purchased a $460,000 home in Las Vegas using an adjustable-rate subprime loan with an initial rate of 8.2%. At the time, she says, she expected to refinance before her interest rate resets to 14% next year, which will raise her monthly payments to $8,000 from $3,700. But in the past year, she says, prices of comparable homes in her subdivision have fallen to $310,000, which means she would not qualify for a new $460,000 mortgage, unless home values go back up to that level, an unlikely scenario. She says she has stopped paying her mortgage and is trying to negotiate with her lender. "I'm going to lose my home anyway," she says, "so why pay?"

Let me get this straight, Darla. You knowingly took a deal from a lender willing to front you the cash, despite your already bad credit, with super low payments to get yourself into your dream home. Now you're living there and NOT EVEN PAYING? Bad luck, sure. A risky investment that didn't pay off, that happens. I'm sure you didn't at the time have a deep appreciation for the highly leveraged scenario you put yourself in. God knows we've all made risky investment decisions that in retrospect were crazy-stupid. (As they say, experience is not something we get until just after we need it.)

What riles me is that this is a perfectly legal deal with two parties taking risk in exchange for an enticing return. Is this really a situation that deserves to be bailed out? So-called predatory lending gets a lot of headlines. No doubt fraud has been comitted in many cases. It's just a bit hard to must a ton of sympathy for any of the participants. [Another aside: Make sure you read Michael Lewis' hilarious satire of this position on Bloomberg.]

Money Management firm and Bond King PIMCO has staked out one of the most bearish positions on the Housing Market of any of the serious Wall Street players. Theirs is also one of the most well quantified. The thoughtfulness bears paying attention to. Pun intended.

PIMCO founder and CIO Bill Gross does a monthly economic outlook podcast which I look forward to the first week of each month. Intricate, playful, and self-referential, Gross constructs his essays in a mini version of the Hofstadter style. To grossly oversimplify, Gross has been generally bearish on the economy, primarily driven by his view of housing market recession for over a year. [aside: the article and podcasts are here. But I'm I the only one who finds Apple's iTunes UI absolutely horrible? It takes me hours to navigate through that morass.]

Today, I'd like to call attention to an article by PIMCO portfolio manager Mark Kiesel. He writes this month that he's "still renting." Citing the litany of housing bubble factors (affordability, excess money, rampant speculation, easy lending, inventories, vacancies, delinquencies, etc.) Mark assumed we'd hit a housing market peak and sold his home in 2006 (in Los Angeles presumably). He has been renting ever since. Mark considers that he'll be renting for another year or two. We'll posit here that Mark is wrong: he's looking at 5 or more years.

It turns out that Mark is one of the few who has the cojones to put his money where his bed is. We've had the discussion at the Casa Simonsen breakfast table. Here's how the scenario plays out:

Me: There's a reasonable chance that we'll lose maybe half a million dollars in home equity over the next few years.

The Wife: You think it's that much? Really?

M: Well, there are plenty of scenarios where the housing bubble pops in a catastrophic way. Or it could be flat for 10 years. Remember we never thought the NASDAQ could lose 80% of it's value.

TW: Well then, Mr. Smarty Pants, that business of yours better pick up the slack. 'Cause we're not going to go live in an apartment.

M: Righto. [goes to get coffee]

TW: No coffee for you. Coffee is for closers.

...And life goes on. (That Wife is a funny one.) Despite the fact that we're acutely aware of the capital at risk, we ain't taking any action.

Our situation underscores the trouble with Mark's plan. Even assuming that PIMCO's fundamental analysis is spot-on and the worst case bubble scenario happens, Kiesel faces the speculative problem of market-timing. What if Kiesel is right, but off by say, four years? In fact, Kiesel addresses the condition, but misses the implication:

Over time, housing prices and interest rates should decline, resulting in improved affordability. This adjustment, however, will take time and occur over a period of years, not months. Housing is illiquid and prices are sticky. As a result, potential buyers should exercise patience and not jump back into the housing market too early. A year ago, I described the state of the US housing market as “the next NASDAQ bubble.” The NASDAQ took over 2 ˝ years to go from peak to trough. I suspect that housing prices could display a similar pattern, and we are still over a year away from the bottom. Given these risks, I prefer renting versus owning, and an investment strategy which favors defense versus offense.

The relative illiquidity of the housing market means that we could be in a five to ten year cycle. The highly liquid stock market took 2.5 years to reach is trough. Housing could be 2x - 4x that time frame. Here's an illustration by the fabulous forecasting firm ECRI. Note the average market correction time over the last 30 years has by over 3 years (green shaded areas). And these are corrections following significantly shorter booms. The implication is that we could have many years of mean-reversion ahead of us. Note that "mean-reversion" could simply be stagnation, with no strong growth (but no drastic crash) while new construction slowly withers, affordability creeps up with wealth, and broad cyclical economic changes kick in. Either way could create a multi year (5? 10?) cycle before related factors catch up to home prices. Bore 'em to death.

So now it's 2011 and your kids are half-grown, you're not in the school district you wanted, but you're a few hundred grand richer. Or maybe not, because a stable home environment has given you the opportunity to focus on building wealth in other areas (see The Wife's comments above).

Much Ado

So much of the housing bubble crowd is fueled by vitriol and schedenfreud, that PIMCO's fundamental analysis is refreshingly pure and compelling. But it doesn't address the problem of what to do about it.

That's why we're so bullish on the housing futures markets emerging. We've discussed some new fangled hedging strategies, but the fee structure makes them cost prohibitive. I'm just hoping some decent consumer-retail products develop before catastrophe strikes. It could be that in a few years, home value insurance products are part of every transaction. Like PMI, but for the buyer, not the lender.

In the end, maybe the housing bubble like Mark Twain with the weather: so many people complaining, but no one doing anything about it.

A couple of months ago we pointed out a firm called REX & Co who are offering a unique approach for refinancing your home.

For anyone considering this kind of equity investment financing, here's a marvelous analysis posted in the comments to that post.

The bottom line is that the fees and deal terms are significantly high enough to make the option profitable as a hedge against declining home values. Akin to selling a call option on your home, you get the cash immediately and if the property value declines, you get to keep the cash (minus fees.) Of course, if just want access to cash but aren't hedging against a downturn, take a HELOC. The interest payments will be significantly lower than the fees and cut that you give to Rex.

After reading about REX here, I was curious about the terms so I contacted them and asked for more details. REX has two similar products: one is for purchasing a new home, and the other is for taking equity out of a home you already own. The home must be your primary residence. I mostly asked about the second product. Here's an abbreviated version of what I learned:

REX will pay you up to 13% of your property's current appraised value in exchange for you signing a contract that gives them their money back when you sell the property plus a 3.5% interest in the change in value (up or down) for every 1% that they paid you. There is also a fee of 18% (!!!) of REX's money due when you sell the property. The up-front costs include you paying for an appraisal, and I think some other small fees, probably comparable to a normal refi, but I didn't get specific numbers. Apparently you have to use third-party appraiser selected by REX.

Here's an example: say your home is worth $1 million today and you want to use REX to take out 10% ($100,000) of the equity. At some later date you sell the house for $1.5 million. The appreciation since the REX transaction is $500,000. At closing, REX will receive 35% (10% x 3.5) of the appreciation, $175,000 plus their original $100,000, plus the 18% fee (18% x $100,000 = $18,000) for a total of $293,000.

If the property went down in value, and you were only able to sell for $900,000, I believe REX would receive their original $100,000 minus 35% of the depreciation ($1 million - $900,00 = $100,000 depreciation, 35% of which is $35,000), plus the 18% fee, for a total of $83,000.

If you improve your property after the REX transaction, you can ask for an appraisal when you sell the property to determine the value of the improvements, and REX will not receive a percentage of the appraised value added by those improvements. You can buy out the contract by getting a current appraisal and paying REX the same amount as they would receive if you were to sell the property for the appraised price.
The 18% fee is going to be much worse for you than just paying interest on a home equity loan unless you hold the property for at least several years after the transaction, and that is without even considering the large percentage of any increase in value that you are signing over to REX.

In the example transaction above, you end up paying REX $193,000 in addition to paying back them back the money they paid you. If you took out an interest-only home equity loan of $100,000 at 8% it would take over 24 years for the interest payments to add up to $193,000. Of course, you would have to be making those interest payments every year. And if the loan had an adjustable rate, you'd be subject to interest rate risk. If you are retired and don't have sufficient cash flow to make the interest payments, perhaps REX is an interesting alternative to a reverse mortgage. Also, if you think your home will stay flat or decrease in value, and you are going to own it for many more years, maybe this is an interesting product.

Last week while discussing the subprime mortgage meltdown and it's effects on the housing market on Bloomberg TV, I made a comment that host Rhonda Schaffler jumped on and caught me by surprise. I said something to the effect of this:

We're very early in the effects of this market meltdown's impact on the housing market. We're likely to see more bankruptcies and financial trouble for the lenders in the short-term. Then we'll see lending standards harden, regulation increase, criminal activity exposed... all these factors will conspire to make it significantly harder for first-time buyers for many years.

My intent was to emphasize the long-term nature of this problem for the housing market. Rhonda focused on the criminal activity comment. "When you say 'criminal activity' are you saying you know something beyond what we know already?" she asked.

Rhonda wanted to make sure I wasn't directly accusing anyone of criminal activity. Of course, I only meant to point out that in the frothy bubbly markets, these things have a way of rearing their ugly heads after the fact.

Exactly one week later, this news alert crossed my desk from the WSJ:

NEWS ALERT
from The Wall Street Journal

March 2, 2007

New Century Financial is the target of a federal criminal inquiry into its accounting and trading in its securities, and said its auditors could warn of "substantial doubt" over the home lender's ability to remain in business. Fremont General, another big lender, said it plans to stop making subprime residential loans and is in talks to sell that business.

The news came the same day federal bank regulators announced a crackdown on loose lending standards on subprime home mortgages.

It's a tough subject to be right about, but there you go.

I just completed a segment with Rhonda Schaffler on Bloomberg Television The Bloomberg Report this afternoon. Topic was the subprime mortgage market shakeout and it's implications on the housing market. Bottom line is this: The subprime crash hits the low income and low-end of the housing market. As of today, the crash has not impacted pricing in the broader housing market. But we see the ripple effect extending several years into the future as the first time home buys are squeezed out now don't become trade-up buyers in the future.

They stream the live TV but I haven't found links to the recorded shows. Let me know if you can find it. The segment broadcast from about 3:10 - 3:20 Pacific time today.

We're quoted in BusinessWeek today discussing the potential ripple effects of the sub-prime mortgage meltdown into the broader housing market.

"The majority of the subprime business is with first-time buyers. So it may take several years to shake out," Simonsen says. "But when it comes
time to sell and trade up we may find that the low end has been squeezed out." In other words, a meltdown in the subprime market could affect the supply of future buyers for years to come.

Based on the evidence we're seeing currently, troubles in the subprime market have not percolated into the rest of housing market. And have not, generally speaking, impacted prices even at the low end. It would appear that current economic strength continues to isolate the housing market from problems in the low-end mortgage world. In fact, in lots of the areas we measure, we're seeing surprising strength of housing demand and price resilience. (More on this phenomenon soon.)

That's why it may take several years for the impact of this change to play out. I used the legs of a stool metaphor with Justin at BusinessWeek. Even though we're seeing one leg weakened, the housing market is currently steadied with a strong economy, still-low interest rates, great employment prospects, and a strong stock market. If in 18 months, we see an economic downturn, that's when we could get hit by the ugly stick.

Bonus subprime mortgage links: Dan Green covers the subprime crisis better than anyone out there. And CalculatedRisk diligently calculates the risks on every nuance of the meltdown.

A hotshot Silicon Valley investor friend pointed out a remarkable firm to me the other day. You have got to check this out.

Many of our readers face a similar scenario. The only way to tap into the grand asset of California real estate is to sell the home or take a loan against it. The home equity loan option is always frustrating: it's my house, my equity! Why do I have to pay interest?! Why isn't there some kind of non-debt financing like there is in every other part of the business world?

Well now there is a new option available. And it looks fascinating.

Rex & Co. (Real estate Equity eXchange) will actually invest in you and your home. They hand you cash in exchange for up to 15% of your equity. This arrangement is not a loan, it's more akin to an investment in your company. They participate in the upside when property values go up and share in the loss should they go down.

Let me repeat: this is not a loan or a reverse mortgage. There is no interest, no debt, no monthly payments. It's an equity investment. When you sell, Rex is entitled to a share of the gain or loss.

REX & Co. is an innovative home finance company that has developed a way for homeowners to receive cash with no interest charges or monthly payments. Our patent-pending product is revolutionizing home finance. Now that homeowners can get cash without the burden of monthly payments, they can improve the quality of their lives in ways they may never have thought possible. For example, they can eliminate debt, buy a home with less, pay college expenses, extend and improve retirement, buy life or long-term care insurance, make charitable donations etc.


For most homeowners today the equity in their home is their largest single asset. That's great, but if they want to use it, they either have to sell their home or take out a loan. Those are not great choices if they need a place to live or don't want the burden of monthly payments and additional debt.

The Rex web site identifies a number of uses for their product. Mortgage elimination. More home for less payments. But in my opinion, the real beauty here is the hedge.

This is the first pure-play hedge that I've seen in the real estate world. You can, in essence, lock in your gains today. Rex let's you take real cash off the table. Like any hedge, you give up some speculative potential future upside in order to lock in gains today.

The hedge is particularly important in the housing bubble era we're in. Lots of folks are worried that their home value is going to fall significantly. But, they say, We're not going to sell the house and move to an apartment somewhere. So we'll just have to ride this wave back down.

The hedge will be a success in several scenarios:

• Property prices fall.
• Property prices increase a little bit, but you use the money to pay off expensive mortgage debt.
  
• You have some other investment opportunity available now, that will appreciate at a greater rate than real estate.

Again, like any hedge, the deal looks not so great in the longer term if property prices go through the roof. You've swapped that risk to Rex in exchange for cash today.

Also, fees and other terms play an important role in how profitable the deal ultimately is. Assuming the terms are not onerous, I think Rex is onto something big.

I'd like to hear from my mortgage blogger favs Xbroker and Dan Green to hear their thoughts. Guys? What's your take?