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New Home Equity Product--Just Don't Call It A Mortgage

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The word "mortgage" these days conjures up the same feelings as the word "leprosy."

So in this era of poor underwriting, mixed with the creative investing brought to you by hedge funds, we have some new companies pitching new products to help homeowners extract the equity from their property without actually taking out a "loan."

Stick with me here.

Grander Financial is one of these companies with a product called "My Equity Freedom." Grander was created by Anthony Hsieh, a man who got very rich pioneering the online mortgage application business. He built and sold two such companies, the most recent one to Barry Diller's Lending Tree. These new products being offered by companies like Grander are less like loans (debt instruments) and more like options to participate in future profits.

They give you a lump sum based on the value of your home--tax free--which you can keep for a certain amount of time and make no payments on. Eventually when you pay the money back, you add to it a portion of your home's appreciation since you got the original money. If your home has lost value since then, these companies will eat part of that loss.

Say your home is worth $1 million. Hsieh's company will give you up to 15 percent of the value, or $150,000. You can keep that money from five to fifty years without paying a dime in payments or taxes. There is a penalty for paying it back within five years. Grander puts a lien on your house for security, but does not put itself on your title (a potentially taxable transaction).

That $150,000 is yours to do with as you please. When you decide to pay it back, usually when you sell your home, you not only pay back the $150,000, but also 50 percent of the home's appreciation since. Say the $1 million home is now worth $1.5 million, you pay Grander $250,000 PLUS the $150,000 you originally got, for a total of $400,000. Conversely, if that $1 million home is now worth $800,000, you subtract half that loss, $100,000, from the $150,000 you owe Grander, meaning you only pay back $50,000.

Hsieh has worked heavily with tax attorneys and others to make sure there are no surprises, but this is not for everyone. You might end up paying less in interest on a home equity loan than you would in giving away half the future appreciation of your house--if we are living in normal times. However, products like My Equity Freedom might work for someone who wants a large lump sum tax free to invest wisely (like in building up a business rather than buying a nice car), and someone who isn't relying too heavily on living off the future value of his/her home. Plus, it may work for Muslim homeowners practicing Sharia, which doesn't allow interest payments.

Other companies are offering similar products, including Rex & Co. and Equity Key.

Hsieh says Grander Financial's gotten funding commitments up to $500 million, with the first $50 million tranche already funded. His 40-employee company is starting to do deals. He says interested customers include younger people wanting to leverage their current home's value without taking out a second mortgage and making monthly payments, as well as baby boomers who want a lump sum now as opposed to the monthly payments they might get from a reverse mortgage (plus the fees are lower).

Hsieh says he's not as interested in the quality of the client as he is in the quality of the home. And he plans to expand the product to commercial properties, and even stocks.

Here's what concerns him. If the housing market turns around pretty soon, people may not be attracted to My Equity Freedom. Why sell off so much of your future appreciation if that appreciation isn't so far into the future? But Hsieh's a gambler who has usually ended up on the winning side of an idea.

The video clips is an extended interview with Hsieh about this new product. Let me know what you think.

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