Could Growth in Alternative Loans Lead to Another Crisis?

October 7, 2019

A growing number of alternative mortgage products are helping consumers with shoddy credit become homeowners without a sizable down payment or through lease-to-own contracts. However, mortgage applicants still must have steady incomes.

For example, Divvy Homes is a startup offering to purchase property on behalf of clients, rent the home back to the clients, and let them build up equity toward purchasing the property in the future. Some such companies will make an all-cash offer on behalf of the client in hot markets. This allows consumers to purchase the house they want, even when they don’t have the funds yet.

Some housing analysts are concerned that the growth of alternative mortgages could fuel a scenario similar to the one that led to the 2008 housing crisis, when a high number of homeowners who could not afford their properties defaulted on their loans. But alternative mortgage companies say that new technology is helping to prevent such scenarios. The Wall Street Journal reports that these companies are using technology to calculate the best price to purchase the homes on behalf of their clients. The algorithms also show what the property will likely be worth over time. The systems also weigh the creditworthiness of potential buyers.

Divvy currently operates in limited markets: Cleveland, Memphis, and Atlanta. The company will purchase a home with cash on the client’s behalf. The buyers put 1% to 2% down and must undergo credit and financial checks to qualify for the program. If approved, they’re able to move in with a three-year lease. Divvy charges monthly rent, but the payment is higher than it likely would be for a standard, similar rental property. That extra amount goes toward equity to purchase a home. After three years, the consumer will own about 10% of the home. They can usually then qualify for a mortgage. Divvy targets homes in the $100,000 to $400,000 range.

“We looked nationwide and saw homeownership rates declining year over year,” Nicholas Clark, Divvy’s co-founder and chief technology officer, told the Journal. “This works for married couples with a family looking to buy their first home who don’t have enough saved up to qualify for a mortgage or who have a credit hiccup to repair.”

Startups That Offer New Paths to Homeownership,” The Wall Street Journal (Sept. 22, 2019) [Log-in required.]