WA Issues Report on Home Equity Sharing Agreements

The Washington State Department of Financial Institutions (DFI) recently issued its report on Phase One of its study into Home Equity Sharing Agreements (HESAs). 

The report is based on information DFI received in response to its inquiry letters sent to ten HESA providers, requesting business plans detailing each step in offering and providing HESA products and services.  Notably, DFI identified that the application process for HESAs either mirrored or were mostly the same as the process of traditional mortgages.  DFI also noted the similarities of the underwriting requirements and appraisal methods to traditional mortgages and that most HESA providers modeled their disclosures using TRID.  In addition, DFI noted that execution and funding of HESA agreements were similar to traditional mortgages by the use of title and escrow companies.

The inquiry letters also requested detailed explanations of the common contract terms for HESA products and services.  DFI identified that, like with traditional mortgages, all respondents utilized deeds of trust to secure their product; required consumers to pay origination fees and other costs (e.g., appraisals, recording fees); and implemented use restrictions and maintenance and insurance requirements on the consumers’ properties.

Apart from its inquiry letters, DFI also reviewed data on active HESAs and terminated transactions.  DFI found that the average loss rate for HESA providers was no greater than the loss rate for traditional first-lien mortgage lenders.

A second report on HESAs and other nontraditional financial services is expected.