Getting Over The Hurdle

*Getting Over The Hurdle*
**By James Comtois**

JamesC***For most homeowners, making regular monthly payments is easy—provided the payments are low enough. The hard part is making that initial downpayment. For prospective middle-class homebuyers, particularly those of the first-time variety, the idea of putting down tens of thousands of dollars up-front can be a rather daunting—if not insurmountable—hurdle.

****This is why one San Francisco-based firm and one community bank in the Pacific Northwest has come up with an interesting funding system to help first-time homebuyers get over that downpayment hurdle. If they’re successful, they may pave the way for a completely new method of homebuying, one that would essentially do away with downpayments—or at the very least, dramatically reduce them.

****FirstRex announced a service to provide homebuyers with downpayment funding in combination with the portfolio loans of HomeStreet Bank.

****Founded in 2004, FirstREX has an intriguing business model. It’s neither a lender nor a bank, but it provides homebuyers and homeowners with financing alternatives to home equity loans and mortgages based on equity instead of debt.

****Under the REX HomeBuyer program, FirstREX will fund up to half of the borrower’s downpayment required on a HomeStreet purchase loan. The downpayment funding from FirstREX is an equity investment—not a grant, subsidy or loan—so there is no interest and the homeowner makes no monthly payments to FirstREX. Apparently the company instead earns a return on its investment when the home is eventually sold, up to 30 years in the future.

****Clearly the firm is betting on the overall profitability of the housing market, since the way the system works is that if the home for which the REX HomeBuyer program has provided downpayment funding goes up in value, then FirstREX earns a profit. If the home has decreased in value, However, FirstREX typically suffers a loss. So like I said, the firm is betting large on the housing market remaining strong from here on out. So okay, that’s admittedly a pretty low-risk bet.

****In turn, HomeStreet Bank will be able to close many home loans that they wouldn’t otherwise be able to.

****“Our focus is on helping people buy homes,” Rich Bennion, executive vice president and residential lending director for HomeStreet Bank said in a statement. “Downpayment funding from FirstREX expands the options of qualified homebuyers to buy a home that will meet their needs.”

****“Many home buyers can easily afford the monthly housing payments on the home they want to buy, but don’t have enough cash saved for the required down payment,” added James Riccitelli, co-CEO of FirstREX. “Others have the cash but are uncomfortable making a large down payment.”

****According to Riccitelli, REX HomeBuyer solves both of these problems. Buyers can buy the home they want today, with less debt and less risk, and also be able to retain some of their cash after closing for other purposes.

****The REX Homebuyer program was originally announced in May, but is being rolled out and available to HomeStreet Bank customers this quarter.

****So could this wind up being a standard method for getting over the hurdle of making a downpayment? A lot of it depends on how successful FirstRex’s business model winds up being. Who knows? If this catches on, this could be the beginning of the end for downpayments. So okay, probably not, but it’s still fun to imagine.

James Comtois has been a financial journalist for more than 14 years and has covered the real estate and mortgage industries for more than eight of those years. He has written for such publications as Crain’s New York Business, MarketWatch, Private Equity Real Estate News and National Mortgage News. He lives in Brooklyn, NY.