Analyzing the Inequity of Home Equity Investments

In the emerging sector of fintech, a novel concept known as a home equity investment is gaining traction, offering homeowners a way to access their property’s value without selling it. This financial instrument involves an investor providing a cash infusion to homeowners in exchange for a 20% ownership stake in their home. Homeowners then have a decade to settle the investment, either by selling their property or repaying the investor based on its appraised value. While four North American companies offer this service, academic research on them is lacking, leaving the economics, incentives, and consequences unexplored. Our research aims to address this gap by constructing a comprehensive econometric model of the housing market, considering both homeowners and investors. We focus on modeling homeowners’ “impatience” (i.e., discount factor), aiming to determine the impatience levels that typically lead individuals to opt for this financial tool. We hypothesize that high impatience, often linked to urgent financial needs such as medical expenses or education costs, drives homeowners towards these investments. Despite appearing helpful, these investments may potentially exploit vulnerable situations. This project seeks to shed light on this situation.

Faculty Supervisor:

Timothy Chan

Student:

Partner:

Dartmouth College

Discipline:

Engineering

Sector:

Finance and Insurance; Public Service, Policy, and Governance; Other

University:

University of Toronto

Program: