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Capital Markets Veteran Outlines New Method of Home Financing

Perhaps you've known someone who raised money for a documentary or civic project by making an appeal through crowdfunding on the Internet. Now, the concept of pooled resources is being used as an investment vehicle offering equity in homeownership to investors and loan assistance to selected prospective homeowners.

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One of the first companies to offer such a program is ""PRIMARQ"":http://www.primarq.com/ in San Francisco, California, a capital market company that uses equity shares to enable a person to be the major equity owner in a property that otherwise would have been difficult or impossible for that person to obtain. In addition, investors are able to purchase partial equities in the property.

The creative mind behind this movement is Steve Cinelli, founder and CEO of PRIMARQ. ""I had an ‘aha moment' one day when thinking about the housing finance base established 90 years ago by the Federal Home Loan Bank back in the 1930s,"" Cinelli told Five Star Radio's ""Mortgage Markets Today"":http://www.blogtalkradio.com/capitalmarketstoday/2013/11/13/unlocking-americas-greatest-asset--cinelli-founder-ceo-of-primarq.

""I realized that other asset classes have both equity capital available to the users as well as debt capital, and I wondered why there wasn't an equity capital market for housing. I also wondered why there isn't financing tied to the asset price movement, namely equity,"" he explained.

Subsequently, PRIMARQ was created to bring equity capital into the mortgage and housing markets.

Some may doubt the need for such a plan in the current marketplace with interest rates being so low and they may doubt that prospective homeowners would choose to invest in equity rather than take on debt in such a low interest rate environment.

Cinelli explained that lenders have become more restrictive in terms of their underwriting, and in January there will be increased standards that make credit availability even tighter.

""You've got to have exceedingly high FICO scores, and banks require additional liquidity over and above the down payment,"" he said.

He says that during the past 18 months, nearly a trillion dollars in mortgage applications have been denied to people whose credit scores were over 700.

""The reason for denial is that the debt to income ratio was too high and/or there was insufficient down payment. In other words, the deficiency of equity causes the problem,"" according to Cinelli.

Cinelli believes that through the homeownership and investment plan offered by his company, many people who find it difficult to be approved for a loan will find a solution.

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""Although there are FHA programs that allow for lower down payments, there are other costs to consider which jeopardize the ability of an individual to qualify for a mortgage,"" he said. ""If the prospective homeowner doesn't have enough capital, then let's bring in private capital to supplement that and allow those investors to benefit from the price movement of the property.""

The first thing PRIMARQ does when considering whether to secure financing for a property is consult with a number of data and analytic firms that not only assess credit market values but more importantly, identify projected price movement and appreciation rates. They also consider other factors that drive price movement such as job creation and inventory in the area.

Secondly, assuming there is a level of debt in the purchase, PRIMARQ looks at how much leverage is being applied to the property. The debt, if priced appropriately, creates a leveraged return for the equity investor.

Then, the third consideration is to ensure the prospective homeowner is qualified to assume the debt. To accomplish this, PRIMARQ does its own credit underwriting.

""We take a proactive view of the homeowner's present employment and also assess his ability to find new employment in case his present job ends,"" Cinelli said. ""Our assessment is not just based on this person's historical employment history.""

And lastly, PRIMARQ assesses the optimal structure between debt and equity for a property and homeowner. As Cinelli explains, once interest rates reach a certain level, equity becomes a less expensive source of financing.

An added advantage to the homeowner who chooses this plan is the opportunity to buy back an investment equity if one of the investors wants to sell. Investors are required to offer the opportunity to the homeowner before other buyers.

Cinelli explained that traditional equity in a home, unlike a stock portfolio, cannot be actively managed. ""It's an asset, but it's a dormant asset,"" he said. ""However, one of the applications of equity finance is that it modifies that dormant asset and enables the homeowner to move it into another asset, making it more flexible.""

In addition to helping individual homeowners, Cinelli believes the use of equity has tremendous positive ramifications, not only for homeownership but for the broader economy and the financial services industry.

""It's a fairly simple concept, although there is some complexity involved in the completion of the transaction,"" he explained. ""It's something that should have been done many years ago, and we're looking forward to changing how finance is done for the improvement of all the participants.""

_Editor's Note: DSNews.com's parent company, the Five Star Institute, and ""Capital Markets Today"" have partnered to create ""Mortgage Markets Today,"" an in-depth, formal talk radio resource featuring expert guests, quality topics, and timely insights on the secondary market, federal compliance standards, real estate, and mortgage lending._

_Investors, lenders, service providers, and all those interested in and affected by developments in the mortgage and housing markets can tune in on the Web (""radio.thefivestar.com"":http://radio.thefivestar.com) or download the podcasts from ""iTunes"":http://bit.ly/1hgUinE ._

About Author: Sandra Lane

Sandra Lane has extensive experience covering the default servicing industry. She contributed regularly to DS News' predecessor, REO Magazine, from 2004 to 2006, covering local market trends, the effects of macroeconomic shifts on market conditions, and "big-picture" analyses of industry-driving indicators. But her understanding of the mortgage and real estate business extends even beyond those pre-crisis days. She is a former real estate broker and grew up in what she calls "a real estate family." A journalism graduate of the University of North Texas, she has written articles for various newspapers and trade journals, as well as company communications for several major corporations.
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