Rex Agreement: Avoid This Like The Plague
You would think that with the mortgage mess still unsorted, the last thing we would see is another exotic home equity product from a financial institution. The Rex Agreement has to be one of the most abusive instruments I can image. It’s just like taking your home equity to the pawn shop. According to the Sunday Seattle Times article:
1. If you have high equity in your home, and it is worth $500,000 you may borrow up to 15% of its value ($75,000)
2. You get the money immediately, free to do whatever you want with it, interest free.
3. You sell your home 5 years later for $700,000.
4. You are required to repay the original REX loan of $75,000 PLUS 1/2 of the appreciation, for a total of $175,000.
It cost $100,000 to borrow $75,000 for 5 years. Let’s think about that for a moment.
If you borrowed $75,000 with a HELOC (Home Equity Line of Credit) from Bank of America at 6% interest for five years, making 60 monthly interest only payments of $375, it would cost $22,500. Hmmmmmm……..$175,000 vs $22,500.
Make no mistake, this is a highly predatory product designed to tap into good folks’ fears. I can hear the “closers” for this one.
1. “You won’t have to sell your home, you can stay where you are.” [Note that these loans are only for people with high equity and excellent credit i.e., older folks that have been scared to death by the media over the last 6 months and think they should stuff their mattress with cash.]
2. “If your home goes down in value, we will share that loss with you.” ["Oh golly, what incredibly nice guys. How could they possibly be crooked if they are willing to accept half of the risk of my home depreciating?" Are you kidding? If they didn't know that the real estate markets across the country have already bottomed out, and are set for a steady march upward in appreciation, they never would offer this product.]
3. “You won’t pay one cent of interest for this loan.” [Gee, thanks! Over the past 30 years, single family home appreciation has averaged about 4% annually. 5 years would mean about 20% appreciation, and I only have to give you guys half? 10%? Where do I sign.]
4. “These are just standard forms.”[My favorite! Let me say this once. When it comes to lending, THERE ARE NO STANDARD FORMS!!! I think that this has been thoroughly demonstrated by the current record foreclosure rates by homeowners who thought they were signing "standard forms" when in fact they were endorsing a time bomb. If people had taken the time to read their loan docs, the entire mortgage/credit mess may have been averted.
If you know elderly homeowners who might be strapped for cash, probably so that they can pay their ridiculously high property taxes, or unforeseen medical bills, warn them against REX Agreements. It is better to explore the offerings of a bank bank based “reverse mortgage” than to succumb to the vultures that will be peddling REX Agreements. They are already advertising on the radio locally. Warn your elderly relatives and friends. They are the primary targets.
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Thanks for the input, you’re right, the statements above designed to attract older people do exactly that . . “scare them into action”, especially the 1st one, “You don’t have to sell your home, you canstat where you are” can be extremely attractive to the uneducated mind as we age. Good article, good tips. Tom
Nice Site layout. Keep up the good work. Looking forward to reading more from you.
Thank you for your great insight. I just wrote about this last week in my own blog. This week I plan to tackle EquityKey, which is the senior version of the REX Agreement. REX Agreements have no age designation. You simply must be old enough to legally sign a contract. EquityKey is virtually exactly the same as the REX Agreement, but targeted at seniors. In the same scenario you mentioned above, the $500,00 home, an EquityKey loan would pay about about $75,000, when a reverse mortgage would pay out over $250,000 in most cases. And the equity sharing is essentially identical to the REX.
Anyway, I don’t want to write my whole article here. I’ll post it in a couple days. But thank you for your insight.
Interesting stuff. A couple quick questions:
In your summary you said homes should go up 20% in 5 years. Your example should have been $500,000 to $600,000 then, right?
I noticed the example you did use (twice your suggested appreciation) suggests repayment of the $75,000 as a “cost”. In your HELOC example, you said it was interest only payments of $375, and hence after that time you would still owe all of the $75,000, right?
I think everyone would agree with your assertion homes go up over time, but in some markets they are down 20%+ in the last year. So, if they go down a little more and then grow at 4% per year from there, there might not be as much appreciation as one would hope for. Who knows? Just a thought.
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A couple of observations on your statements:
In your first example, unless you plan on trying to stiff Bank of America, you have to pay back the $75k principal in addition to the interest, so your repayment is $97.5K, not just the $22.5k you stated. Still a lot less than the Rex Agreement, but not as dramatically so as you state. Also, your example assumes nearly 8% annual appreciation. That’s pretty high relative to long term history, and obviously the higher your assumed appreciation rate, the worse the Rex Agreement looks.
In point 3, it seems to me that paying half of 4% annually wouldn’t be too bad if that were your actual interest rate. You state it as 20%, which seems to imply it’s a lot to pay, but I don’t know where else you can borrow for 2% per year. The problem, though, is that it’s not 2% per year on the amount you borrow, it’s on the whole house.
The easiest way to analyze the true cost of this debt is to assume a certain level of appreciation and calculate the annual interest rate. While I think your choice of 4% is still a bit high, it certainly makes the math easier. You will then be accruing interest at 2% per year of the value of the house. But, since you could only draw 15%, your interest rate is 2% divided by .15, or 13.33%.
Just about as I figured. Even taking into account a lot of the technical jargon from some of the above comments, in the best scenario for the Rex Agreement, it is still a rip-off just like all of the other “get your easy money here folks” schemes, only worse. Under the ARM loans, the “assumption” was that in four or five years, you’d be selling and taking a profit. With this, you have to sell and they get the profit. Thank you for a very educational post.
Thanks! I was wondering what the heck a Rex Agreement was. I figured if they were advertising it so heavily it was a rip-off. I was also made suspicious by the complete lack of information offered in the ad, including a lack of “fine print”. Thanks for answering my question!
Hi
Your example is so poorly constructed, especially the repayment of the HELOC at the sale of your property as to make it totally misleading. I think it should be rewritten so as to be less misleading.
Soooo Peter, Why don’t you enlighten us. Explain in detail exactly how this works, in a way that everybody can understand.
Thanks for this dialogue. I think what is lost in your analysis is the use of the money to invest in realestate – especially in this down market. The advance payment provides downpayment to purchase investment property – interest free – with the possibility of high returns. If there is a flat market, or downturn, I think the Rex agreement hedges your loss on your primary residence.
David, the only way the Rex agreement is good for that is if you use the Rex money to pay cash outright for a new home because the Rex doesn’t cover the new home and no matter what happens on the old one, you have a place to live.
Otherwise it’s not a good investment. Assuming that property values would go up and borrowing money accordingly is how we got into the current mess.
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Respectfully, I believe your comments are poorly researched and sensationalized. The REX agreement isn’t a loan. It’s actually a purchase option. They are essentially buying a percentage interest in your home for a down payment and an additional payment when you sell or refinance.
The price can be hefty for access to the cash today, but this is only a determination that can be made in hindsight. They are investing in your home, not lending you money. There’s nothing shady about an investor expecting a potentially higher upside than someone taking less risk (i.e. collateralized loan). FYI – I think these guys are backed or financed by AIG.
This is definitely not a product for anyone with a rosy view of the real estate market going forward (i.e. any real estate agent) or necessarily anyone that just needs access to capital. A HELOC would certainly be cheaper unless the market does nothing but stay flat or drop over a reasonable period of time. Some people, however, may prefer the risk of losing some of their upside to having additional overhead in the form of a payment.
The real catch to the product is that the property is locked up (with a declining pre-pay penalty) if liquidated within the first five years. The other X-factor is, of course, the appraisal value. If you believe the market is currently undervalued, then you’ll likely not be happy with the starting value for this type of equity participation.
I think the Rex agreement is unfair in that they are “buying” 50% of the appreciation for 15% of the equity (plus the return of the $ amount of the 15%). What if they “bought”
only 15% of the appreciation (puss the return of they original $)
I am thinking of selling my house and taking back a rex-like recordable agreement for part of the selling price (say 1/4) but my agreement would give me only that part (1/4) of the appreciation upon the next sale plus the return of the 1/4 – more simply put when my buyer sells I get 1/4 of the sale price. That seems like a fair deal – what do you guys think? What dangers to me do you see?
Well, down here in the trenches, with people that are scared to buy, fearful of selling into a weak market, etc., the REX agreement is too sophisticated for most folks. I have met too many homeowners that have racked up negative amortization FOR YEARS with WAMU option payment plans, and never realized they were going backwards when making the minimum payment. The REX agreement may be a useful instrument for a select few. However, given the abusive practices of a few unethical lenders over the last 6+ years, I am concerned that this is another instrument that may be readily sold, and not fully understood. The red flag that may attract the wrong applicants is “cash now”. The red flag that unethical lenders might use to attract applicants is “cash now”. The country’s economic woes may be tied at least partially to folks using their home equity like piggy banks, wouldn’t you agree? In addition, most folks rarely know what they are getting into with anything that has a pre-payment penalty. With the majority of Americans operating with little savings, home equity is often the only place they may turn in an emergency. To compound an emegency financial, or medical situation, with a prepayment penalty is a lot of gas thrown on the fire for many folks. Thoughts?
You are wrong…housing prices are still falling. In the six months after you wrote the article, the housing market has declined at a double digit rate.
The position in the article misses the basic fact that property owners want cash out of their homes, land and commercial property now. They do not want debt.
Very few products will do this. Three come to mind, REX Agreements, EquityKey and NestWorth.
You can find more information http://www.EquityOptionsUSA.com
Regards,
David H. Schwartz
Broker
Here’s one…I will die in my current home. Based on Rex, I can take $240K now with no payments or interest. Maybe buy that airplane I’ve been wanting. I have no heirs so when I die who cares what happens to the house or the equity? I’ll donate the house to charity or something and let them enjoy whatever’s left. I see all home loans as debt not net-worth, and that’s the problem. The 30-year mortgage started this whole notion of using a home for leverage and also what initially started home prices into a range that makes a long-term loan necessary. I say NO MORTGAGES OVER 5-YEARS! Watch how the system will control itself then. There are actually 10-year car loans now too! We’re a nation of debtors. Sad.
Bill and Diana,
I found your site because I was looking for an alternative to a Reverse Mortgage for my Mother.
In 2005 I Refinanced her home @5% for 15 years. I get a call from her to looking into this reverse mortgage(I am Against it). When I look at her loan to find the loan amount, it turns out it is not the same loan that I had set up in 2005. Not by a long shot. She now has a loan for close to 7% for 30 years. The difference in her payment was 80 dollars from the 15 to 30 year loan. They charged her almost $8,000 dollars to set up the loan.
To say that I am upset would be an understatement.
I have a question for you. What would you do? Who would you talk to? BBB? I want to go after them because of their lack of Ethics. Lending Tree- Lending Tree WOW…It explains why so many people do not trust anyone…Banks!!!!
Now some comments on your Article. You should try and be fair about the figures. They have been pointed out from others but I still do not see the charge listed to set up a loan! $75,000 plus $22,500 plus any other cost associated to set up the loan.
Your article does make me think. I will have to research this more.
Any advice on Who I should notify about this Unethical practice would be appreciated.
Thanks Jeff
Here is how I look at the REX Agreement. It is another alternative to obtaining money. Would it be the first place I would look to obtain money, no, because it can be very expensive. Just as a reverse mortgage should not be the first type of loan that someone considers. It too is more expensive than a “traditional loan”. Having said that, someone may not qualify for the “traditional loan” or may not want to have monthly payments. These would be two of several reasons why someone who needs money may choose a reverse mortgage or possibly a REX agreement. I am hesitant to say any loan program is bad, it depends on what a person qualifies for and how much of a need they have for the loan. The important thing, is that a person understands their alternatives, how each program works and the cost involved. Then they can make an informed decision. The best way to help protect yourself and get the information you need, is by working with someone you know or have been referred to and they have years of experience in the mortgage industry.
Brian Schafer – Loan Consultant
http://www.equitynorthwest.com
Great article.
THANK YOU SOOOOOOO VERY MUCH FOR YOUR IMFORMATION…..I JUST REC’D A CALL FROM A REP AT REX & CO….SO I DECIDED TO LOOK IT UP BECASUE THE RED LIGHT IN MY LITTLE HEAD WENT OFF..I”M LOCATED IN NEW HAMPSHIRE AND THEY ARE NEW TOO THIS AREA…..THANKS AGAIN. HELEN
Over the past weeks, I filled out the Rex Agreement application and sent in many pages of backup documentation (W-2s, 1040s, verification of assets, documentation of the primary mortgage, etc.). I spent a couple of days getting my house and yard ready for the appraisal visit, and believe that my Visa card has been charged for the appraisal, which took place almost two weeks ago. On Friday of last week, I heard from Rex & Co. that the Rex Agreement is no longer being offered. I am told they will reimburse the cost of the appraisal, and will post here if that happens.
Okay, you need to do your math here. The 20% appreciation over 5 years equates to a $50,000 payoff in addition to the $75,000 principal (not $100,000). If you do the math, that equates to a 10.8% interest rate. High, no doubt, but since it doesn’t appear that homes are going to be doing much appreciating in the next 5 years it might actually be much less than this.
My mom had filled out the Rex Agreement, and was waiting to hear from them. After waiting about 2 weeks, I (her son) called and was told the Rex Agreement is no longer offered.
Rex & Co. have indeed sent a check to refund the cost of the property appraisal. This doesn’t compensate for the significant hassle we went through, but I applaud them for the prompt reimbursement of the appraisal cost.
Prior to the Sept crash I had redone your published figures to be more realistic and consistent. (See below)
1. If you have high equity in your home, and it is worth $500,000 you may borrow up to 15% of its value ($75,000)
2. You get the money immediately, free to do whatever you want with it, interest free.
3. You sell your home 5 years later for $600,000.(More realistic and consistent with what follows)
4. You are required to repay the original REX loan of $75,000 PLUS 1/2 of the appreciation, for a total of $125,000.
It cost $50,000 to borrow $75,000 for 5 years. Let’s think about that for a moment.
If you borrowed $75,000 with a HELOC (Home Equity Line of Credit) from Bank of America at 6% interest for five years, making 60 monthly interest only payments of $375, it would cost $22,500. Hmmmmmm……..$50,000 vs $22,500. When you take in account the approx $3,000 cost of money at 5% lost during the 5yrs of loan payments, the comparison cost is $50,000 for REX vs $25,000 for the loan. Still a terrible deal!
Now, after the crash, we’ll have to see what loan rate and realestate price changes would apply.
Let’s see. If I took out a $100k REX Agreement in December 2006 when my house was worth $800k. In 2011 that house is now worth $500k. I will walk away from the $100k that REX “gave me” without making a payment, and it did not cost my anything but time. (they have a 5 yr prepay penalty so in 2011 I’d have zip charged to me for paying the REX off)
The agreement is difficult to understand, but with todays downturn in values which will continue into 2013, the REX Agreement was a great thing for home owners who did not want a high fee Reverse Loan.
I’ve been reading all the posts here, and rather upset with the closed minded statements here. your view “rex” is the devil ooooh, scarry. What I want to know is why everyone is thinking short term? who cares about the “5 year pre-pay penalty”! I seen no problem with the rex agreement, theres no payments whatsoever until you sell.
You have upto 50 years to sell, or pay them off.
lets take another example one that goes like this.
Your strapped for cash, barley making ends meet have equity in your home but can’t tap the equity because you can’t afford any more monthly payments than you already make. You’ve put your entire life savings into your home, and you need to pay off some debt.
Lets also say your going to stay at this home for the next 25 years, and have no plans on refinacing because again you cannot afford anymore payments.
would you still say “TERRIBLE DEAL”?
lets see how that plays out…
Borrow $75,000 REX Borrow $75,000 BOA
Fees appra. $250 Fees appra. $250, closeing $3,000
payments $0.00 30 yrs paymenys 30 yrs $375x 30 =$135,000
cost of money $0.00 cost of money $12,000
now the house is worth $500,000 as you say but whats to say the house won’t stay at $600,000 0r $800,000 in 30 years maybe even loss value!
Rex gets “50%” of the increase in value =150,000 + the original $75,000 = $225,000
BOA gets your money every month, god for bid you loss your job, get hurt, etc. etc. and can’t pay. the would Foreclose. But they get $147,000 plus you pay $3000, closing cost. seems the same to me! but no worries about not making the extra payment!
Even if the home value went up to $900,000 I’d still say it was worth it! money now with no worries for upto 50 years, in 50 years I could be dead who cares what happens to the house like the other gentleman said.
Don’t even let me get started on the investment possibilities! you could easily turn that $75,000 into a milion or more in 30 years, what if you used the rex agreemnet as a cash cow? buy a home, use the rex agreement, get money, buy second rent first, use rex agreement on second, buy third, rent second…..etc.
the possibilities are endless!
No offense but I think you are a little bias, maybe because your in real estate, and look for people to turn around there homes over and over as your business.
If you have any solid knowledge of wrong doing or of bad experiences with this product please post, but opinions are like *** holes everyone has one, yours is just as good as mine.
Thanks for reading and have a great day!!
Interesting blog you got here. It would be great to read a bit more concerning that topic.