Tap equity now, appreciation repays bill

Until recently, only reverse mortgages allowed homeowners to borrow against their home's equity and postpone repayment for years.

Now a new deal on the block allows that. But unlike a reverse mortgage, the Rex Agreement doesn't charge interest and homeowners don't have to be 62 or older, as they do with a reverse.

What's more, a Rex Agreement isn't even a mortgage. It's technically an option agreement developed and offered by a California firm.

Seattle was selected as one of its first markets by San Francisco-based Rex & Co. because "it has a high percentage of a demographic group we think can benefit most from a Rex Agreement, and that's a group that has high equity in their house," says Thomas Sponholtz, the firm's founder and chief executive.

The Rex Agreement gives owners of single-family homes up to 15 percent of their home's current worth in exchange for up to half the increase in value when the house is sold or the agreement terminated.

For example, the owner of a $500,000 house signs a Rex Agreement to cash out 15 percent of the home's appraised value. That's $75,000. The owner gets the money immediately; there are no restrictions on its use.

Ten years later, the owner sells the house for $700,000. Rex gets the original $75,000 back, plus half the increase in the home's $200,000 appreciation, for a total of $175,000.

The homeowner keeps the other $100,000 in appreciation plus the entire increase in value before signing the agreement. Any home improvements are credited to the owner.

If the home's value falls, Rex and the homeowner share in the decrease equally.

For example, the same $500,000 house eventually sells for $450,000. Rex's loss on the sale is $25,000, which it subtracts from its original $75,000 payment to the owner. That leaves the owner owing Rex just $50,000.

The Rex Agreement is so new not much exists on its pros and cons, although various blogs are trying to fill in the gaps.

Who is behind it

Using newspaper ads and direct-mail fliers, Rex & Co. is marketing the product, which it believes to be unique, directly to consumers. In the future, Sponholtz anticipates financial advisers and insurance companies will get in on the action.

Fees include many of the costs traditionally associated with a mortgage, including appraisal and title insurance. Owners who sell within five years also face an exit fee. Rex places a lien on the home but does not appear on its title.

Consumer-protection laws, rather than banking and mortgage regulations, are the oversight.The company's lead investors are AIG Financial Products and RBS Greenwich Capital.

According to Rex's Web site, its leadership team has banking and securities experience with such firms as Bank of America, Barclays Global Investors and Nomura Securities.

"We're not saying we're better than reverse mortgages or home-equity lines of credit or anything else," says Sponholtz. "Providing more choice for homeowners is what we do."

He thinks baby boomers nearing retirement will be the biggest customers, and some will use the money to lower living costs by paying off existing mortgages.

Unknown cost

Keith Gumbinger, vice president of HSH, a New Jersey mortgage-consulting and information firm, has no direct knowledge of Rex. However, he has studied equity-conversion tools offered over the years by banks and others.

Gumbinger's main concern is that Rex borrowers have no way of foretelling how much the agreement eventually will cost them.

That depends on the housing market and how long the agreement runs before the owners end it. Forty years is the maximum in Washington state.

For example, take homeowners who get $50,000, their home appreciates $100,000 and they have to repay Rex $100,000 (the original loan amount plus half the appreciation). They'll wind up paying $50,000 to borrow $50,000.

"You can be assured traditional costs will be much less," Gumbinger says, referring to other sources of equity conversion, such as home-equity lines of credit.

Gumbinger also is concerned potential Rex clients may not easily understand the agreement they're signing (although Sponholtz stresses the company won't finalize an agreement until the borrower fully understands its 35-page product guide).

Not understanding what they were signing is how some borrowers got into the option-style, adjustable-rate mortgages that have led to foreclosures, Gumbinger points out.

Currently, Rex Agreements are available only on single-family, owner-occupied homes and only to borrowers with good credit.

Elizabeth Rhodes: erhodes@seattletimes.com