Introducing Housetable
I have mixed feelings about our financial system. On one hand, I am amazed by how financing has become more accessible than ever for both consumers and businesses. Companies like LendingPoint have made personal loans more accessible, companies like SoFi have made student loans more accessible, and companies like Figure have made home equity loans more accessible. On the other hand, while these companies have done a remarkable job, six months ago, Gabriel Deutsch, Emanuel Nafcha, and I decided they were not doing enough.
We agree that it is as important as anything to get rid of the archaic and paper-based loan application process that most US banks still rely on, and lending-tech startups have done a phenomenal job improving that. Although a bigger pain point in the market still remains unresolved — the underwriting processes used by traditional lenders are antiquated. Underwriting methods and guidelines used for most loan products were established before the invention of the internet and have not evolved since. This results in millions of individuals and businesses being rejected for being considered “too risky” and forces them to seek financing from much more expensive sources.
With the advent of new technologies, such as machine learning, we believe that lenders can now obtain access to broader and more precise information about potential borrowers, that was either inaccessible or unverifiable in the past. By leveraging these newly accessible data points, loan underwriting methods can evolve and millions of potential borrowers that were previously deemed “too risky”, can now be considered creditworthy; in a risk-averse way for lenders.
The sector that we saw the most imbalance in is Home Equity Loans. Similar to personal loans, to take out a home equity loan, borrowers need to provide their lender with a personal guarantee, but uniquely, they also need to provide a junior lien on their home as extra security. This is why home equity loans typically carry significantly lower interest rates and longer repayment periods than unsecured personal loans. Similar to other mortgage loans, the underwriting of home equity loans is split into three risk categories: credit, income, and collateral. Credit risk is meant to measure the trustworthiness of the borrower, and virtually all lenders rely on a borrower’s FICO Score, a standardized rating system generated by three large credit reporting agencies to do so. FICO Scores are determined by looking at other loans which the borrower previously took out and the timeliness of their repayment. Income risk measures how a borrower’s income compares to the amount of debt which they already have, and they also measure the likelihood of that borrower maintaining that income level. Lastly, collateral risk, as the extra security, measures the likelihood of the lender getting their principal back in the unfortunate event that the borrower defaults and they are forced to foreclose on and then resell the borrower’s home.
While there is a lot to be said about the underwriting flaws with regards to credit and income risk calculations, we saw the most urgent pain point around the third category: collateral risk.
To provide some background, there are over $260B worth outstanding home equity loans and lines of credit in the US, 50% of which is used to pay for home improvement projects (according to the US Census Bureau’s Housing Survey). Despite the fact that it has become almost common knowledge that renovations if done correctly, can make houses significantly more valuable, traditional lenders are still not factoring this into their collateral risk calculations. Borrowers that are looking to spend their entire loan amount on improving their homes look no different from borrowers that are going to be spending the money on a fancy vacation. We found this ridiculous because if ever there is a foreclosure, lenders could get significantly more by selling a newly renovated home compared to a non-renovated one. This means that millions of US households with great credit but limited collateral, or home equity, are being denied these low-interest loans and are being forced to turn to more expensive options such as personal loans, credit cards, and even loan sharks. The affected group includes new homeowners that are looking to buy a fixer-upper, older couples that have been living in an outdated house in an up-and-coming neighborhood, and virtually anyone else looking to do a major home improvement project.
We dug deeper and spoke to dozens of underwriters from top US banks and they all told us the same thing. While they agreed with us in theory that renovations can make houses more valuable, that it can be factored into their collateral risk calculations, and that it can enable them to approve significantly more borrowers. Although, they said that the work that would have to be done to make this possible in practice would be an operational nightmare. This is because, to make this happen, lenders would have to manually review the borrower’s renovation plans, vet their contractors, look at comparable properties (comps) in the borrower’s neighborhood, repeatedly send human inspectors and set up an escrow account to pay contractors on a milestone basis. This would require a lot of additional overhead for lenders and it would make the process a nightmare for borrowers as well. This is why, aside from a couple of unpopular products offered by government agencies, traditional lenders, such as banks and credit unions, are choosing not to update their underwriting methods and miss out on this huge potential pool of borrowers.
Now without further ado, let me tell you about what I came here to do, tell you about Housetable.
Housetable is building a new lending company, from the ground up. We are not just making our loan application more user-friendly but we are revolutionizing and fundamentally rethinking the way in which loans are underwritten — beginning with home equity loans.
For the first time, Housetable is offering home equity loans, with a loan-to-value (LTV) based on the after-renovation value (ARV) of a borrower’s house. In other words, we don’t just consider what a borrower’s house is worth at the time of the loan application, but also consider it has the potential to be worth after it’s renovated. Unlike traditional lenders, we have the ability to do this in a risk-averse yet scalable way thanks to our technological core. We have developed sophisticated artificial intelligence algorithms that can precisely calculate the after-renovation value of a potential borrower’s house, as well as determine which specific improvements are most likely to add the most value. This means that within seconds, borrowers can not only know the size of the loan which they can qualify for but also what renovation plans their home qualifies for. Additionally, using our contractor management app, homeowners can keep track of the progress of their renovation projects and pay their contractors seamlessly. Unlike construction loan alternatives, this means 0 paperwork, 0 tedious visits from inspectors, and instant approvals.
We are Housetable and we are looking to allow more people to improve their homes with financing that works for them. Join our mailing list at housetable.com to stay in the loop!
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David Benizri
Co-Founder and CEO
Housetable
