Splitero’s Michael Gifford says HEIs could gain market share as mortgage rates stay high

Sarah Wolak: In your eyes, as someone in the home equity investment space, what do you think the market needs to do to build that greater awareness and trust?

Michael Gifford: I think just general growth, right? Most homeowners still don’t know that home equity investments exist; it’s a very small part of the entire mortgage ecosystem. Splitero is spreading the word and making sure that homeowners are educated about the options to access their home equity.

If you look at our market and the trillions of dollars of potential — that’s just a massive market, so educating consumers takes quite some time. It’s just general growth of the product in the category. I think we’re well positioned to do that with the current interest rate environment and economic environment. Homeowners need to access the equity, and the general homeowner comes to us with over 50% of their home’s value in equity. So they’re trying to figure out how to use that to better their lives and we’re here to help with that.

Wolak: How can people tap into that home equity now, especially as rates are staying high? As more people, including investors, become more familiar with the asset class, how do you expect the contract structures and pricing to evolve, coupling with more consumer awareness?

Gifford: It’s part of the evolution of a financial product, right? You have to align two markets — the capital markets and their expectations of returns, and then the consumer side of it and what a consumer will use.

And I think that we’re still in the early part of that, although it’s matured rapidly over the last several years as the interest rate environment changed. A lot more investors came on board with this product on the capital side, and really, as that growth happens, you’ll see two things.

First, pricing will come down for consumers — which is what Splitero is actively trying to do, is help people access their equity for cheaper. But then, broader participation around the capital markets as well as larger institutions and pockets of capital will come into the HEI market. There’s more demand for those assets, and as we do securitizations, we see substantial amount of demand for our securitizations.

As we continue to mature that program and more securitizations get out of the market, more capital floods into the space and prices come down for consumers. We’re still in the early innings of that, as far as the maturation of a financial product, but that’s where we expect it to go. This product should sit naturally, probably slightly more expensive than a HELOC, but lower than we’re at today. And so we’re doing a lot of work to try to get that to happen as soon as possible.

Wolak: Can you explain why you think it should be slightly more expensive than a regular HELOC?

Gifford: Well, a HELOC comes with a monthly payment, so if you’re an investor, you’re getting that monthly yield. An HEI doesn’t. There’s no monthly payment on it, so for that, they expect slightly higher returns, at least in the current state of the market, which is understandable.

I think, naturally, the reason we started the company is that this should be a pretty large percentage of the HELOC market as this grows. People really can change their lives with a product where they get a lump sum of cash and then they don’t make a monthly payment until they’re ready to pay it off. That’s a real game changer and a pretty unique vehicle that we offer.

Wolak: Let’s get into the payment structure. Is it more akin to a reverse mortgage than a HELOC, or is it its own separate beast?

Gifford: It’s its own separate beast. With a reverse mortgage, you have to refi your first mortgage. So your first mortgage, with this product, stays in place. If you have a low-rate mortgage, that stays in place, and that’s a very important thing for a consumer. Their monthly payments don’t change.

Like a HELOC, you get a lump sum of cash on day one, but you don’t make a monthly payment, and you pay it off whenever you want in the future, whether you refi or sell your house, or you have a big chunk of cash that you want to use to pay this off. So that’s kind of how it differs.

But those are two pretty important characteristics between competitive products. You get to keep your lower-rate mortgage in place, and as soon as you get the money, you’re not making a monthly payment the next month, and it doesn’t change your cash flow. I think cash flow is very important for a lot of households in the U.S. right now, and so keeping that low-rate mortgage in place and not having another $1,000 or $2,000 payment next month is important for people.

Wolak: Other providers in the space have payment caps on their products. Does Splitero deploy that?

Gifford: We do. We call it a safety cap, so that protects the homeowner’s upside. They know that cap is the max that they’ll ever pay on the funds. And it also kind of gives them a comparison point, where if they can use a traditional financial product, or if they’re looking at a credit card — you know, 30%-plus or whatever they’re at right now — they know where we sit, and they can use that as a tool to estimate what this is going to cost them.

We provide a pretty thorough disclosure set. The hard part about this product is that I don’t know when you’re going to pay back or what your home is going to be worth. And those are two major variables to figure out what this product costs you outside of that cap. The max that they would ever pay would be that cap, so it gives them the opportunity to look at the future. Our disclosure lays out a bunch of different time frames, a bunch of different valuation scenarios. The 17.99% cap is flat across the board.

Wolak: Let’s talk about the Senate proposal to classify HEIs as residential mortgages under the Truth in Lending Act (TILA). What is your perception of that proposal, and would Splitero have to effectively change its business model if that happens?

Gifford: Yeah, we do a lot of work with the state regulators and federal regulators. That’s been our ethos from day one. We’ve been very, I would say, conservative on the regulatory front. I was a licensed real estate broker and mortgage broker for several years before Splitero, so we’ve been very much front and center on the regulatory side.

The hard part about TILA is the annual percentage rate. And if I don’t know exactly what this is going to cost you on day one — because I don’t know when you’re going to sell or repay, or what your house is going to be worth — it’s difficult for us to tell them the exact APR.

So while we’re doing a lot of work with state regulators and federal legislation, we want regulation. We want very clear guidelines for where this product sits, and we can follow a lot of the TILA and RESPA regulatory space for the mortgage industry. But the APR is very difficult for us to tell you on day one, because we just don’t know those two variables.

Wolak: Do you think the public perception of HEIs is creating their own challenges? There have been quite a few lawsuits in the the space. Does that raise questions with your customers and in the conversations you’re having with state regulators?

Gifford: Yeah, those are two very different things, when you’re talking about a homeowner or state regulator. I would say we’re not just keeping a pulse on it. We’re actively working with states and federal regulators to try to make sure we have successful solutions.

Illinois is a great example of a state where we gave them a bunch of data, we gave them proposed legislation, we worked with them and we have a great outcome. I think other states will follow that.

Consumers do a lot of research, so when they come in, they start Googling all of our names. They see a lot. They talk to all of us. I think that, like you saw with reverse mortgages or anything else of course, when you’re introducing a new financial product, there’s always going to be bumps in the road along the way.

You have to properly educate consumers. That means explaining the good and the bad of every product — keep it as plain language as possible. These are all things we’ve been doing since day one. But I think that in general, most consumers still just don’t know about the product. They think, ‘I have a bunch of equity in my house; I can get a HELOC,’ but if their debt-to-income (DTI) ratio doesn’t cover it, if their FICO score is not great, whatever their circumstances are, they might not be able to qualify.

The HELOC decline funnel is only growing substantially. So I think that most people are still just kind of being educated on the HEI product, let alone the trouble in the space as far as the lawsuits.

Wolak: When you’re referring to the HELOC decline funnel, can you elaborate on that?

Gifford: Yeah, HELOC qualifications, along with reverse mortgages, are based a lot on the interest rate and being able to repay. If interest rates go up and people’s income don’t, it can make it a lot harder.

The qualifications for HELOCs and and other products have gotten a little more strict, meaning they decline a lot of applicants. They can’t actually qualify. A lot of homeowners have a good job, they have a low-rate mortgage, but then they go to a traditional financial product and their DTI is out of whack or their FICO is not quite where it needs to be, so they can’t qualify for those.

To be honest, a lot of homeowners are in a tough spot where they have hundreds of thousands of dollars in equity in their house. They have a 3.5% or 4% mortgage rate. If they look at a refi, it’s over 7%, and it just doesn’t make sense to change their monthly payment that much. So that provides a lot of opportunity for the HEI product.