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Many developers have already slashed prices and chopped overhead, leaving little room for further cutting, notes Bob Curran, a managing director at Fitch Ratings. "It comes down to how desperate the builders and developers are to do something like this — to take 20% off the top - when many have already cut things to the bone," he says.
Joel Rassman, chief financial officer of luxury homebuilder Toll Brothers Inc., says the program sounds "expensive" to him, although he does say that a lower fee "might make the program worthwhile" in certain markets.
The program isn't without risk for homebuyers either. It requires the homeowner hang onto the new home for eight years before being able to exercise the put option. If the owner sells the house on the open market or loses it in foreclosure before the eight-year waiting period expires, the person is out of luck — the put option becomes worthless. However, homeowners do have the option of opting out of the program in the first six years in exchange for handsome cash bonuses, ranging from 10% of the purchase price in year one to 3% in year six. Still, some analysts feel homeowners should be permitted to exercise the put — i.e., sell back the house at its original price — after three or four years.
Some also question the program's long-term financial viability. Sirius Value isn't regulated since it's neither an insurance product nor a security, and experts caution that a lot can happen to a market, program or company in the eight years before the put option can be exercised. "Do they have the financial resources and will they be here eight years from now?" asks Curran.
James Wilson, a managing director at JMP, expressed similar concerns. "It all sounds great, but when push comes to shove, and if we had another housing collapse in eight years, could the counterparty afford it?" asks Wilson.
Andrew Herzberg shrugs off such concerns. He says it all comes down to how the assets are managed, how the real estate performs, and, if all else fails, a reinsurance contract. He says the 20% premium fee will be placed into an investment trust and actively managed over the eight year period. He says he has two banks, Wells Fargo and Credit Suisse, on board to manage the assets and even lend money against the home in year eight if needed. On top of that, he says talks are underway to bring in a reinsurer. "The reinsurers' job is to step in at the end of the day and make up any shortfall should there be a shortfall," he says. "I don't want anyone to have any question about where I will be in year eight."
However, when Wells Fargo and Credit Suisse were contacted, they confirmed there had been "discussions" with Hertzberg's group, but said no formal agreements had been hammered out yet.
Herzberg also defended his group's experience in the field, noting that he and his brother Kenneth have spent decades in the investment banking arena, with Kenneth having worked at such firms as the Carlton Group and Madison Equities and Andrew having worked as a trader at Rosenthal & Co., and Societe Generale. "We have collectively been in the real estate business — the parties combined — for about 60 years." He adds that the program would not be financially viable in the current environment, though, without the 20% fee.