In October, Bennett got the almost $40,000 she needed to pay down debt that was costing her more than $1,900 a month in car, personal-loan and credit-card payments. In return, Palo Alto, California-based Point -- which is backed by investors including Greylock Partners, Andreessen Horowitz and Vikram Pandit, the former chief executive officer of Citigroup Inc. -- wanted to own a piece of her property.
“I have all this equity in my house but I couldn’t use it because of my credit score,” said Bennett, whose FICO score was less than 600, on a scale of 300 to 850. “I can breathe now because all my money isn’t going out the door.”
Financing to homeowners is loosening up after a 30 percent increase in property values nationally since the 2012 trough. While many lenders have been letting the most credit-worthy borrowers tap their homes’ equity, Point is targeting customers who have been largely unable to trade accumulated wealth for cash or don’t want to take on the additional monthly payments associated with traditional loans.
In the years leading up to the real estate crash, easy financing helped people buy homes they couldn’t afford and then borrow against their equity as property prices rose. The collapse in home values ripped through banks that bought mortgage securities, helping trigger the U.S. recession. At Citigroup, CEO Charles O. “Chuck” Prince was ousted in 2007 in the face of mounting losses tied to subprime mortgages and replaced by Pandit, who himself left three years ago.
Since home prices bottomed in 2012, banks have reduced the percentage of cash borrowers can take out when refinancing and tightened credit standards for home-equity lines of credit, HELOCs, requiring higher FICO scores and full documentation.
A typical HELOC is a second mortgage, repaid monthly with interest, that homeowners can use in full or draw on as needed. Point is making an investment in the form of equity, so customers have no obligation to pay the firm back until they sell or refinance their homes, for as long as a decade.
That type of funding could ultimately cause financial issues for the homeowner, said Sarah Edelman, director of housing policy at the Center for American Progress.
“While it may be appealing to get an upfront lump sum of cash, the risk here appears to be that a consumer could end up with a more expensive product with harsher repayment terms than they would with a more conventional loan,” said Edelman, whose Washington-based policy institute promotes economic mobility.
Many Americans with high debt-to-income ratios and low credit scores have limited financing options. For personal loans, both LendingClub Corp. and Prosper Marketplace Inc. customers have average credit scores of 700 or above. And the traditional home-equity lending market has been open primarily to borrowers with good credit.
“The home-equity market is still very restrictive,” said Greg McBride, senior financial analyst for personal-finance data provider Bankrate Inc., adding that FICO scores are a major factor in determining whether a person qualifies for financing. “It starts getting tougher below 680. Below 620 it is both really hard and really expensive.”
Nicole Bennett wanted to pull cash out of her house in Antioch, California, to reduce a growing mound of debt. When Bennett’s mortgage lender, Wells Fargo & Co., refused the social worker because her credit score was too low, she turned to a technology startup called Point Digital Finance Inc.