From the New York website: A Palo Alto startup backed by the likes of Greylock Partners, Andreessen Horowitz and former Citigroup CEO Vikram Pandit is offering loans in exchange for equity stakes in the homes of would-be borrowers with bad credit.
The firm, Point Digital Finance, is offering cash loans to people who are restricted in their borrowing choices. The price? The borrower’s soul — or at least a piece of their house. The company only deals with borrowers who own at least 25 to 30 percent of their homes.
Point Digital doesn’t collect payments. It’s paid when borrowers sell or refinance their homes. If that doesn’t happen after 10 years though, the arrangement shifts, and the borrower merely owes a normal loan repayment, at 15 percent effective annual interest, Bloomberg reported.
If the borrower can’t pay, Point Digital seize his or her home and collects its due from the proceeds.
“If your home does well, we both do well,” CEO Eddie Lim explained to Bloomberg. “If your home doesn’t do that well, then this was one of the cheapest sources of financing that you could have obtained.”
If this reminds you of the kind of thing that caused the financial crisis, then you have a fair working understanding of what caused the financial crisis.
Sarah Edelman, director of housing policy at the Center for American Progress told Bloomberg that the loans were a risk for borrowers.
“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,” she said. [Bloomberg] — Ariel Stulberg