Start-up offers reverse mortgage loans for an indefinite period to elderly home owners.
Of all the business opportunities created by the aging of America, William J. Texido has come up with one of the more intriguing. It's a new financial product that his San Francisco start-up, Providential Home Income Plan Inc., began offering last August. Called a "lifetime reverse mortgage," it lets people 62 and older turn the equity in their homes into a monthly check for as long as they live.
Texido, 52, knows from financial products. In the early 1980s, he built BRAE Corp. into a $500-million company with 1,500 employees by leasing railcars to short-line railroads. BRAE was #1 on the '83 Inc. 100. Three years later Texido left the company, ready for a new challenge. He thinks he's found it in Providential.
The potential market is huge. Some 13 million Americans 65 and older, Texido notes, own all or most of their houses. Altogether, their real estate is worth more than $750 billion. But at least one-third of these people are living below the poverty level -- which is where his reverse mortgage comes in. It is essentially a loan, secured by the property, that gives borrowers monthly payments for an indefinite period. The debt is repaid only when the borrower moves, or dies. That's different from bank-sponsored reverse mortgages, which are usually written for fixed terms of 10 years or less. As for the size of the payment, it depends on such factors as the person's age (the older you are, the more you get); the property's value; its expected rate of appreciation; and Providential's interest rate (currently 11½%).
Thus, for example, a 76-year-old man with a $100,000 home in Los Angeles would be eligible to receive a maximum of $500 per month at today's rates. If he dies within the first few years of the loan, Texido says, Providential would get to keep the lion's share of the appreciation when the house is sold. The company's return would suffer if the borrower survives, and continues to live in the house, beyond his life expectancy of 13 years. "We're taking a risk that California property will continue to appreciate by at least 8.9% a year," Texido says, and also that most customers won't live much beyond their actuarial life span.
To date, Providential has done -- or is working on -- more than 300 deals, all in California, where it's licensed as a consumer finance company. The venture capital-backed company has recently received a commitment for an additional $17 million in debt through a private placement, with which Texido plans to fund more loans. Capital and state regulations permitting, he intends to expand to other regions. "It's a huge market with a tremendous need that isn't being filled."