You would think that with the mortgage mess still unsorted, the last thing we would see is another exotic home equity product from a financial institution. The Rex Agreement has to be one of the most abusive instruments I can image. It’s just like taking your home equity to the pawn shop. According to the Sunday Seattle Times article:
1. If you have high equity in your home, and it is worth $500,000 you may borrow up to 15% of its value ($75,000)
2. You get the money immediately, free to do whatever you want with it, interest free.
3. You sell your home 5 years later for $700,000.
4. You are required to repay the original REX loan of $75,000 PLUS 1/2 of the appreciation, for a total of $175,000.
It cost $100,000 to borrow $75,000 for 5 years. Let’s think about that for a moment.
If you borrowed $75,000 with a HELOC (Home Equity Line of Credit) from Bank of America at 6% interest for five years, making 60 monthly interest only payments of $375, it would cost $22,500. Hmmmmmm……..$175,000 vs $22,500.
Make no mistake, this is a highly predatory product designed to tap into good folks’ fears. I can hear the “closers” for this one.
1. “You won’t have to sell your home, you can stay where you are.” [Note that these loans are only for people with high equity and excellent credit i.e., older folks that have been scared to death by the media over the last 6 months and think they should stuff their mattress with cash.]
2. “If your home goes down in value, we will share that loss with you.” [“Oh golly, what incredibly nice guys. How could they possibly be crooked if they are willing to accept half of the risk of my home depreciating?” Are you kidding? If they didn’t know that the real estate markets across the country have already bottomed out, and are set for a steady march upward in appreciation, they never would offer this product.]
3. “You won’t pay one cent of interest for this loan.” [Gee, thanks! Over the past 30 years, single family home appreciation has averaged about 4% annually. 5 years would mean about 20% appreciation, and I only have to give you guys half? 10%? Where do I sign.]
4. “These are just standard forms.”[My favorite! Let me say this once. When it comes to lending, THERE ARE NO STANDARD FORMS!!! I think that this has been thoroughly demonstrated by the current record foreclosure rates by homeowners who thought they were signing “standard forms” when in fact they were endorsing a time bomb. If people had taken the time to read their loan docs, the entire mortgage/credit mess may have been averted.
If you know elderly homeowners who might be strapped for cash, probably so that they can pay their ridiculously high property taxes, or unforeseen medical bills, warn them against REX Agreements. It is better to explore the offerings of a bank bank based “reverse mortgage” than to succumb to the vultures that will be peddling REX Agreements. They are already advertising on the radio locally. Warn your elderly relatives and friends. They are the primary targets.
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Comments 4
Interesting stuff. A couple quick questions:
In your summary you said homes should go up 20% in 5 years. Your example should have been $500,000 to $600,000 then, right?
I noticed the example you did use (twice your suggested appreciation) suggests repayment of the $75,000 as a “cost”. In your HELOC example, you said it was interest only payments of $375, and hence after that time you would still owe all of the $75,000, right?
I think everyone would agree with your assertion homes go up over time, but in some markets they are down 20%+ in the last year. So, if they go down a little more and then grow at 4% per year from there, there might not be as much appreciation as one would hope for. Who knows? Just a thought.
Thanks for the post!
Thank you for your great insight. I just wrote about this last week in my own blog. This week I plan to tackle EquityKey, which is the senior version of the REX Agreement. REX Agreements have no age designation. You simply must be old enough to legally sign a contract. EquityKey is virtually exactly the same as the REX Agreement, but targeted at seniors. In the same scenario you mentioned above, the $500,00 home, an EquityKey loan would pay about about $75,000, when a reverse mortgage would pay out over $250,000 in most cases. And the equity sharing is essentially identical to the REX.
Anyway, I don’t want to write my whole article here. I’ll post it in a couple days. But thank you for your insight.
Nice Site layout. Keep up the good work. Looking forward to reading more from you.
Thanks for the input, you’re right, the statements above designed to attract older people do exactly that . . “scare them into action”, especially the 1st one, “You don’t have to sell your home, you canstat where you are” can be extremely attractive to the uneducated mind as we age. Good article, good tips. Tom