Sociology professor leads investigation into new financial products for homeowners

At the request of the Washington State legislature, sociologist Mariana Amorim is leading an investigation into how new financial contracts could help homeowners access equity in their home.

Amorim, an associate professor in the Department of Sociology at Washington State University, specializes in research on families, social policies, and household economics. She is the principal investigator for the study commissioned by the Washington Department of Financial Institutions to investigate and analyze the impact of Home Equity Investments (HEIs), an emerging financial instrument. The research study is being conducted through the Evans Policy Innovation Collaboration (EPIC) at the University of Washington.

"I was trained as a family demographer, and a lot of my work is about how people exchange time and money through family networks to allow everyone to thrive," Amorim said. "When families lack a private safety net, and when the government isn't providing public support, families end up resorting to what is often called a shadow safety net, which are very expensive ways of accessing money."

HEIs, also known as home equity contracts or shared appreciation agreements, are relatively new financial instruments on the market. Existing homeowners can get an upfront payment from a company in exchange for a future single lump sum repayment that is based in part on the home's value. HEIs are usually advertised as an alternative product to the more traditional reverse mortgage loans, cash-out refinances, or a home equity line of credits (HELOCs).

"Home equity investments are a new way for consumers to access the wealth in their homes. It is not technically a loan but an option agreement. Yet, from the consumers' perspective they are seen as akin to existing mortgage loans," said Amorim.

According to the Consumer Financial Protection Bureau (CFPB), the HEI market is dominated by four companies, all of which specialize in home equity investments and who do not offer mainstream mortgage products. Several other smaller companies have begun offering home equity investments in recent years, and the overall market is small yet rapidly growing with total volume estimated between $2 billion and $3 billion. In comparison, the market for mainstream HELOC originations has a projected valuation of $31 billion by the end of this year.

Because these new financial instruments aren't well-known, some consumers have encountered issues when utilizing HEIs. This is because HEIs are complex financial contracts that have non-standardized disclosures, making it difficult to understand or compare to other options.

"Some products out there, like reverse mortgages, require customers to partake in a counseling session before receiving the loan. But for home equity investments, there are very few standardized requirements for companies on how to educate and inform consumers about how HEIs work," said Amorim.

Amorim points out that only three states other than Washington are beginning to regulate HEIs, but the products are not currently included in Washington state's Consumer Loan Act, which establishes basic protections for consumers. However, the current study is working closely with both the Department of Financial Institutions and companies active in the HEI market, sharing industry data and information through a collaborative effort. She is hopeful that the upcoming report from her research colleagues will provide legislators with a better understanding of these financial products and their impact on Washington homeowners.

"This is our department's first collaboration with the Evans Policy Innovation Collaboration, and we're really excited about it," said Amorim. "I think there's going to be a lot of interest in the results of this report, and we're hoping it will be informative and help the State of Washington make good choices for regulation that will benefit consumers."