Jeff Uter would have needed to sell stocks or pull cash out of his consulting business to afford the down payment on a $780,000 home in Orange County, California.
Instead, he paid half of the 20 percent required and got the other $78,000 from San Francisco-based FirstRex. In exchange, the real estate investment firm will get 40 percent of any gains in the value of Uter’s 4-bedroom condo in a golf course community.
“I have stocks and my own business,” said Uter. “I’d rather invest in that than put it in a personal residence.”
FirstRex is seeking to benefit from homebuyers who need extra cash as values climb at about the fastest pace since 2006 and lenders require larger down payments after loose mortgage underwriting helped fuel a global crisis. It’s luring banks in expensive markets from California to Connecticut that must compete harder for customers after a surge in borrowing costs from near-record lows dried up refinancing demand.
With the recovery underway, FirstRex started offering the down payment assistance this year using money from pension funds and endowments to fill a need otherwise served by wealthy relatives, according to co-Chief Executive Officer Jim Riccitelli.
“Houses are really affordable right now because interest rates are low, even after the recent run-up, but housing is not that accessible,” Riccitelli said. “If you can’t get the house, affordability doesn’t really matter.”
High-End Markets
While almost half of all renters who’d like to buy are concerned about down payments, FirstRex’s initial focus is on high-end markets within California, Washington and Oregon, where its customers’ average house price is $800,000. The company also plans to invest in Massachusetts and Connecticut homes, according to Riccitelli.
For lower-cost properties, the Federal Housing Administration insures mortgages as large as $729,750 and allows down payments as low as 3.5 percent. FirstRex’s offering also isn’t approved for loans of less than $625,500 bought by government-backed Fannie Mae or Freddie Mac, which unlike most banks accept private mortgage insurance.
Barclays Plc analysts led by Nicholas Strand wrote in a report last month that the regulator for Fannie Mae and Freddie Mac had looked into the FirstRex. Callie Dosberg, a spokeswoman for Washington-based Fannie Mae, and Brad German, a spokesman for McLean, Virginia-based Freddie Mac, declined to comment, as did Denise Dunckel, a spokeswoman for the Federal Housing Finance Agency.