When starting a business, the management team often turns to equity financing instead of debt, which allows them to avoid interest payments and focus on using cash flows to grow the enterprise and achieve profitability. Over the life of the business, management will optimize the mix of debt and equity financing that yields the best returns for the company at that particular time. Until now, consumers considering the purchase of a home had no equity option, they could only secure debt in the form of a mortgage. Yet homeowners face many of the same challenges as businesses do.
The reality is, the U.S. is a debt happy nation. We love to service people with debt, but too much debt often creates a cash flow issue for many Americans, much in the same way that businesses can struggle with cash flow issues. What we need is more equity financing options to help Americans unlock the value of their largest asset (the home) and reduce their personal debt burden.
That is where Thomas Sponholtz and Jim Riccitelli, Co-CEOs of Unison come into the home buying equation. Thomas and Jim have changed the way Americans finance their homes by introducing an equity financing model that can bring about a brighter future for the American housing economy. The Unison solution is a harbinger of a new era with increased access to homeownership and reduced risk of mortgage rate defaults. They are taking what works so well in the commercial real estate space and the corporate world and applying it to the housing market.
Buyers rejoice! Check out my discussion with Thomas and Jim below to learn more about how they are changing the game at Unison…
CL: Thomas and Jim, both of you come from deep backgrounds in the financial services world. Can you talk a bit about your background and how you ended up building Unison?
TS: Before founding Unison I was with Barclays Global Investors, managing fixed income and we had just built a fixed income alternative investments group and launched the first of many Fixed Income iShares. We managed funds for the largest pool of investable assets globally; namely pension funds, endowments and other investors with liability tied to long-term inflation.
The firm’s assets-under-management, at the time, was around $1.5 Trillion. We were the world’s largest institutional Investment Manager but we had no investments in the asset class of residential real estate. Not only is residential real estate the largest single component of the US economy, accounting for roughly 16% of GDP, it is also the largest asset class, roughly $30T. Furthermore, it represents about 40% of the consumer-price-index, which is the benchmark, or long-term liability, that our investors seek to outperform. In other words, it is the single largest missing piece in an institutional investor’s optimal asset allocation and portfolio.
Or as Unison shareholder and former CEO of Barclays Global Investors says: “Residential Real Estate is the world's largest asset class, and it is massively underrepresented in pension fund and endowment portfolios, especially considering the natural alignment between its investment characteristics and the long-term liabilities and spending objectives of those investors.”
I wanted to allocate and invest in the asset class but there was no investment vehicle or method to obtain efficient exposure to the asset class; that was the initial spark that gave birth to the idea behind Unison Homeownership Investors. We needed to find a way to invest alongside homeowners for the benefit of both the homeowner and investor. I socialized the concept with various clients, former and currently employers and they all had the same response: “it is such a big and perfect idea, I can’t believe it does not exist already. You need to build this; we want to provide the capital.”
CL: Turning to you Jim, how did you end up at Unison after Thomas had founded the company?
JR: My background is pretty varied, but the most relevant pieces of it can be traced to my five years as a Director at Nomura Securities when Nomura was the largest commercial real estate lender in the country. After that I was the director of Nomura’s financial technology venture fund for several years. I got pretty good at understanding financial services business models and the buildout of operations, and understanding the process of raising operating capital.
After that, I was planning to take a couple years off, and then I met Thomas, and I didn't take a couple years off. I said this is too good of an idea, so I decided to join up. It was an easy decision. That was 2006. It’s been a great partnership.
CL: Thomas, once you got the okay to figure out how to invest in the exposure of real estate, how did you approach building Unison?
TS: I went out and said okay, first, let's just buy 10,000 homes and rent them out, but the problem with that is that it costs so much money to maintain. That means you can only do it in areas where there's high rental cost and low home price appreciation. Since the vast majority of US Real Estate value is in and around big cities we needed more exposure in metropolitan areas like New York, Washington DC, Chicago and the whole west coast.
We had to figure out how to get into the metropolitan areas and figure out a way to finance alongside homeowners. This approach is akin to equity financing in commercial real estate and in corporate finance, right? Most businesses finance with equity because they can't service the debt. How come a homeowner can't get a business partner in a co-investment situation? That's why we call ourselves a home ownership investment company because we really invest in the home, alongside the home owner. We figured out how to do this, and that was really the genesis of Unison.
With that we got investments from most of the senior executives at Barclays Global Investors, from endowments and bank CEOs, to go build this platform for consumers and pension funds and endowments. That was the start. Then Jim joined about a year and a half later when we were looking to scale the business. He's phenomenal at scaling big operating platforms, and that's kind of how we met the first time, and here we are now.
CL: What are some of the challenges you faced in building such a powerful product that really had not existed before Unison came to be?
JR: The original program was our Unison HomeOwner program, where we make an investment alongside an existing homeowner, which allows them to unlock some of the equity in their home without borrowing. That’s basically a deal just between us and a homeowner, with no one else involved. Frankly, that program was easier for us to launch because you don't have to get the rest of the home finance and purchase ecosystem involved. Basically, we offer homeowners a great way to tap into their equity and if they already have a mortgage on the property we put a second lien in behind that existing mortgage.
With the Unison HomeBuyer program, it's a different situation because they're getting a mortgage loan at the same time. Now the mortgage lender will say, ‘Where's that down payment coming from? Who are those Unison guys? What does that second lien look like?’ Now you're in the situation where you have to get the approval of the mortgage lender in order to be able to transact. In order to get the approval of the lender, you have to have the government-sponsored enterprises (GSE’s), and the regulators on board as well. We had to go through all of that in order to launch the HomeBuyer program.
CL: How does Unison get loan underwriters comfortable with the home buyer only putting 10% down, with the other 10% coming from Unison?
JR: We don't do that on an individual underwriter basis. We actually started at the top of the house by explaining our program to the regulators. The regulators then introduced us to Fannie Mae and Freddie Mac, the government-sponsored enterprises (GSE’s), and we worked with them and are now able to combine our HomeBuyer program with a Freddie Mac-eligible loan. This has allowed us to go to the lender, and say here's the deal, you guys already sell loans to Freddie. You can sell those loans to the GSE with us in second position, and they are comfortable with that.
Once the top of the house at the lender approves our program, we then conduct training for all of their underwriters and processors, and loan officers so they understand the program and know how to use it in their ordinary dealings with clients on a daily basis.
CL: In thinking about the scalability aspect of Unison, do you have to go state by state to get regulatory approval to grow this business?
JR: In each state before we conduct business there we'll do a deep legal review of the applicable state law. In that review, we make sure that there's nothing in particular about the state law that is at odds with how we conduct our business.
We also determine what license is necessary. Typically we need a real estate license, so we're licensed as a real estate broker in the states where we operate. We're not a lender so we don't need to be licensed as a lender. Our transactions are real estate transactions.
TS: Additionally, at the federal level, we had to integrate the HomeBuyer program into the mortgage eco- system.
In order to do that we had to start from the top and work with the Federal Housing Finance Administration (FHFA) that oversees Fannie Mae and Freddie Mac and the housing policy in the United States. Once we were reviewed by the FHFA, then we worked to orient and familiarize the CFPB, the FDIC, the Federal Home Loan Banking System, and Freddie Mac with what we are doing. It's a massive undertaking to integrate this kind of financing into the system but it is also the only way to do it at scale.
JR: But it's a very slow moving system. There's a lot of very innovative people at lenders and regulators, and they love innovation, but the bureaucratic component of it is overwhelming. You just have to be persistent, and ultimately when people do learn about this they realize that it really is a great benefit to the economy and the American people.
TS: At the end of the day we prevailed because this is true innovation that eliminates a giant inefficiency in the system to the benefits all parties involved; the homeowner, Investors, and the stability of the housing market. The great benefit to the lender is that they can offer a normal 80% loan-to-value mortgage to their client but provide the homebuyer with a 10% down payment solution alongside of Unison’s 10% down payment.
CL: Is Unison integrated with the entire mortgage industry at this point, and if not what approach are you taking to expand the reach of this product?
TS: We are not integrated with all mortgage lenders yet but we are constantly adding to the list of lenders we work with. Last quarter we trained two thousand loan officers across thirteen states, so it's spreading and growing very rapidly.
Unison HomeBuyer is very compelling for loan offices because the refinance boom has come to a halt with rates going up, and now they're all competing for purchase mortgages. The mortgage is a commodity product so that means the only way they can compete is to have the best rate or to differentiate in some other way.
We help the lenders we work with to differentiate themselves by saying you can get a homeowner into the house they want for half of the down payment, or allow them to comfortably afford the home they want. The real estate agents love it too because now someone’s purchasing power is significantly greater and suddenly you can offer them many more options to check out when they’re home shopping. It makes the realtor look like a hero.
CL: Can we talk more about how this product can benefit the American people?
JR: Americans have too much debt, and they're overexposed to one asset, which is their home. They're not properly diversified. It's beneficial to the consumer if we can reduce the amount of debt they carry, and it’s beneficial to the financial system if lenders originate fewer high balance loans. Having loans with at least 20% down is safer for the overall economy. That takes away some of the risk that taxpayers bear by standing behind the GSEs.
We reduce debt and simultaneously increase accessibility of home ownership. That’s an amazing thing, and basically there was no way to do this before. The way the lending industry increased accessibility to homeownership was to offer more debt products to consumers. And then they threw mortgage insurance on top so they could offer even more debt. This adds more cost to the consumer, but the mortgage insurance doesn't benefit the consumer, it only benefits the lender.
The industry has made all these debt-based solutions available in an effort to increase housing accessibility, and now what we’re doing is saying you don't need all that extra debt. You can have normal levels of debt, and still get the housing you want, while reducing economic risk. The regulators we spoke with seemed to really appreciate that.
TS: Much like equity financing adds value to commercial real estate, we are adding value to residential real estate. At the same time it doesn’t reduce market share for mortgage providers, it adds more value to them because it increases access to home ownership.
On the investor side of the business, what we have created is a very efficient way to access the residential housing asset class for the benefit of pensions and endowments that are very patient as it pertains to long term investment of capital, which in our case is 30 years. They don't need a lot of cash flow, and it matches the need that they have with the need of the consumer. The institutional investor wants inflation hedging for the long term, and they have a lot of investment capital. The consumer on the other hand needs capital but has the inflationary asset. Our business brings together these two huge demands and meets both of their needs.
CL: In thinking about the benefits to the homebuyer what are some metrics related to the impact Unison has on the home buying process for the consumer?
JR: From a timing perspective, we cut the time in half for a person to be able to buy a house because they only need to save for half the down payment rather than the whole thing. The purchasing power benefit is also very significant. If you're buying a house and you're getting an agency loan, you can buy with 10% down, but you'll wind up with a 90% loan that has a mortgage insurance premium baked into it, which equates to a monthly payment that is 15% to 20% higher than the monthly payment on an 80% loan with no mortgage insurance.
That means that for a given level of income you can now look at homes priced 15% to 20% higher for the same monthly payment. If you are buying a more expensive home with a jumbo mortgage, you are likely going to be required by the lender to make a full 20% down payment. For a client that has strong income but is cash constrained for the down payment, when we double their down payment we can potentially increase their purchasing power by 100%.
And then there’s a benefit to the buyer that is simply looking for the lowest monthly payment. You can buy the house you already had your eyes on with a monthly payment that is 15% to 20% lower. That can mean three, four, five hundred dollars or more extra in your pocket each month for other important life expenses. For buyers that have plenty of cash available for a down payment, we enable then to retain some of their cash for other purposes such as a child’s education, or remodeling the home, or just to diversify their investment assets, instead of winding up with all their eggs in one basket, the home.
CL: I’m curious to hear more about the thirty year term of the investment. What if someone wants to move out early? Also, what if there is a housing downturn, and the homeowner forecloses? Are there things that you have in place to protect your investors?
JR: Our program is extraordinarily flexible. The client can use our money for up to thirty years without making payments. Of course, most people will not stay in their home for thirty years, and there's no requirement that they have to stay in the home. They can sell the home anytime they want during the thirty year period.
They can also buy us out after three years, based on an appraisal.
TS: To the point about downside protection, what you need to understand is that at the core of Unison is the fact that as investors alongside the homeowner, we're partners. Keep that in mind. We're not a lender. We're not opposing parties, we're partners. That means that if there's equity in the house, and they lose their job and cannot pay, we might step in and help prevent a foreclosure by making the mortgage payments. Then we can make an orderly sale of the property rather than a distressed sale. That happened with some of our clients during the downturn. We look to protect each other.
CL: In some ways it sounds like there is naturally built in downside protection for the homeowner as well by partnering with Unison?
JR: Our customers actually like that. We've heard consumer feedback that they feel good knowing that if they do get into trouble we may be able to help. It depends on the circumstances, of course, but if they are in default on a loan, a rational person who's in default on their mortgage loan should never let it go to foreclosure if they have equity in the property.
But if something is going on with that individual and they’re not behaving rationally, and they get close to the foreclosure date, we could come along and say look, it doesn't look like you're going to take care of this. You've got equity in the property and we've got equity in the property, and we don't want to see the property go into foreclosure. Let us make an advance to bring the loan current, but we're going to market the property now and sell it in a normal fashion so that we get full price for it. The homeowner benefits big time from this - they walk away with their equity and without a foreclosure in their credit history.
CL: As an equity partner what other ways can you help benefit the homeowner and make the process more seamless?
TS: As a partner we have an interest in you getting the most out of your house financially, and being satisfied living there and taking care of it. For example, when you want to make a home improvement, since we're partners we can advise you on what home improvements might have the greatest financial gain, and which ones won't. In some markets swimming pools add value, while in other markets it's not such a good idea, so we help homeowners sort through that. At the same time we allow you to keep all of the upside from making home improvements since you paid for them.
We also know the most successful realtors in all our markets, so when it comes time to sell we can supply the homeowner with the realtors in the local market that are most efficient at selling homes in their price range. We can help them make decisions about staging the house. We might make a contribution to staging the house, as well, and guide them in preparing the house to be ready to sell.
During the buying process, especially for first time home buyers, the buyer benefits by taking comfort from having a professional investor like us partner with them. They know the price is right, they know the inspection report has been read by somebody else, and they know that we wouldn't invest in the home if it wasn't a good idea. They keep the lion's share of the upside, and don't have to pay for our insights and support. We get paid through the investment, just like they do.
Essentially we just want a fair price and a fair relationship. We make money by creating true partnership with homeowners. You build a great large scale business by adding true value to the consumer. We are highly focused on fairness and transparency, and regulators really appreciate that. It has to be pure and it has to be a national program with diversified portfolios.
One last thing, the key to partnership is to start at the same price as the homeowner. If you start by discounting the home value, we're not acting like a partner. Partnership means you start at the same price, and you provide them very long-term capital, and they can buy you out along the way without selling. Those things are very important to our buyers.
CL: It’s apparent that you are building a very powerful product. But if we take a step back for a moment, let’s discuss the early days of Unison. In 2007 you were just getting the business off the ground and then the 2008 market crash happens. At that point what happened and how did you manage to overcome it?
JR: Well, that was our one major detour along the way. We certainly weren’t planning for the housing crisis. Back in 2007 and early 2008, we were advertising on television and radio. We were in fourteen states at that point, and it was starting to work. We scaled up our staff, and were up to about 55 people, with over ten thousand consumers that were in our pipeline, that had indicated interest and wanted to transact with us. Everybody in the company was feeling great and starting to believe this was going to work and then we saw Bear Sterns, Lehman Brothers, and AIG all go down, and the housing markets collapse.
A few years later we emerged out of it stronger than ever, and relaunched everything. When we came out we decided that we should take the technology that we had developed for helping existing home owners and apply it to helping somebody buy a home in the first place.
We knew that was going to be a much harder road in some ways because we had to go figure out how to get the regulators and the GSEs and the lending community to understand what we were doing so that they would permit us to have a seat at the table to transact in this new way. That took a number of years and a lot of flights to Washington D.C. but we were able to make it happen.
CL: Now as we move into better days, Unison recently raised $300M, what do you think your investors saw in the timing to make them want to invest?
TS: After having raised hundreds of millions of dollars on the fund capital side we are deploying that capital at a rapid rate. It's really coming together. Our investors have been convinced. A lot of our shareholders are investing because they want to get capacity in our investor funds. A lot of them have committed to also buying future funds. We have $300 million, there's literally billions of dollars behind that number right now from our same shareholders, the same investors.
We have a track record, keep that in mind. We managed assets through a crisis, and we learned how the investment behaves and the homeowner behaves. We're driving down the cost of capital to the consumer at a rapid rate because there is this natural fit on both sides.
JR: It goes back to what Thomas said earlier, about why investors like this. Our assets hedge inflation, and these investors had no exposure to the asset class historically despite it being a major component of the overall economy. It’s an asset class these investors need to own.
CL: How do you envision Unison five years down the road from now? (e.g., will you be offering more services, will you be in all 50 states, etc.)
JR: In 5 years, Unison will offer a suite of home ownership investment programs which will be widely utilized. Unison's name will be synonymous with innovation and expertise in residential real estate.
The Minute Rundown with Thomas and Jim
CL: If you could provide one lesson to someone considering starting up, what would it be?
TS: Raise double the funds you think you need.
JR: Make sure your product addresses a genuine and significant need and adds true value to the client.
CL: If you could model yourself after one founder who would it be and why?
TS: Founders who I have admired are Reed Hastings and Marc Randolph of Netflix. I like how Netflix is constantly adapting and reinventing itself as it changes and is itself changed by the industry. Hastings negotiated the complicated and treacherous media ecosystem of regulators, content publishers, cable providers and telcos to deliver unprecedented value to his customers. I see Unison on that same sort of path and benefitting from the same sort of nimbleness in our own mission.
I always find that the best startups I find are those that were created out of a genuine problem that was identified. Thomas saw that there was a need to invest in the residential real estate market to gain exposure to an asset class that hedges against inflation. What he created was a powerful mechanism that does just that.
In solving this problem he and Jim have built a product that not only services investors but they are also doing something that I believe can be a major deterrent to the next housing downturn. Think about the fact that during the market crash of 2008, people fled their homes in droves as they could no longer pay for their mortgage and no longer knew where to turn.
Unison changes the conversation. The mortgage lender conversation is, pay me back for giving you money to buy this house and give me interest for doing this. If the money stops flowing the bank says you’re done and takes the asset back. Unison says we are in this with you. We will get out of it together and potentially help you to make payments if need be. Changing that conversation to let’s save this asset together and help you reduce your debt burden to manage your cash flows better is a conversation we need to have.
The only way to prevent more downturns is to stop allowing the piling on of debt around every corner. Unison does just that. The dynamic team of Thomas and Jim is invigorating to watch and I cannot wait to see the impact they have on the American housing market.
Exciting days lie ahead. Thanks Thomas and Jim for investing in truly Simple.Innovative.Change