Non-FDIC Insured ‘High Yield Savings’, Backed by Vague Promises — My Money Blog

A few readers asked about the Tellus app, which compares to savings accounts and pays 3.00% APY with no cap. (4.50% APY is only up to $2,500.) Here’s a quick explanation of why this is an easy pass. Tellus investments are not FDIC insured and only provide a very vague description of how your money is actually invested. From their FAQ:

How can Tellus afford to pay me such a high interest rate?

Tellus generates its revenue as a non-bank lender. We provide mortgages – loans secured by residential real estate. We use technology and proprietary data to choose opportunities to minimize loss and fraud; this allows us to pass the benefits on to you in the form of highly competitive returns.

That’s a lot of fancy words, but my translation is “Tellus lends your money at well over 3.00% APY on unknown residential real estate of unknown quality, in unknown geographies, at unknown loan-to-value ratios” .

Mysterious underlying investments. Think of all the properties in the world that could fall under “US based real estate”. With a more transparent structure like that of Peerstreet, I can choose the exact address of the house or building in which I invest. I can see the original estimate. I see the terms of the borrower and the interest rate. I can find purchase history, tax records, and search for comparable properties nearby. I know I earn 7-9% interest rates and Peerstreet takes about 1%. With Fundrise, I get updates with the address and photos of the exact apartment building they just bought, and they’re SEC-registered private REITs. With Tellus, I have none of that. They require a lot of confidence for a new start-up business. Are the loans wrapped in a vehicle away from bankruptcy? Are they registered with the SEC?

Dubious security promises. When I lend on residential property, I also accept that I may lose money on the transaction, because that’s how the world works. It’s honest. From their FAQ:

Is my money safe? Can I still get my money back?
Yes, your money is safe. All transactions and personal identification data are protected by bank-grade 256-bit AES encryption. You can be sure that your money and data are safe with Tellus. You will always be reimbursed and you can withdraw at any time.

In my opinion, this is not honest. If you’ve been paying attention during the crypto crisis, you know that “You’ll always get your money back and you can withdraw at any time” actually means “Your money really is the asset of a young startup, and if some something bad happens, we can instantly freeze all withdrawals.” Home loans can go bad. Startups can go bankrupt.

This reminds me of the biggest red flag in peer-to-peer lending: the more someone promises to repay you, the less likely they are to repay you.

Low returns for the level of risk. Even though I knew Tellus was lending money using smart, conservative underwriting… 3% APY? Why should I take so much risk for 3% APY? A 90-day treasury bill yields more than 3%. I would expect at least double the risk from home loans, which means Tellus could take a big cut for themselves (they don’t disclose their cut either). I regularly post FDIC insured offers at effective rates of 4% + APY with 100% certainty that I will get 100% of my money back. With a new starter app investing in who knows what, there’s a real possibility that I’ll never see my money again.

Tellus might be run by honest, well-meaning geniuses, but there’s no way I’m taking so much risk for limited advantage with my hard-earned cash. Look beyond clever marketing and photos of happy families. There are many alternatives offering a higher return with a more easily assessable level of risk.

Bottom line. Tellus advertises “high yield” and “security”, when in my opinion it offers the opposite: relatively low returns for the level of risk you take (which is completely unknowable since you have no idea what they invest in). You risk completely losing your investment in a young startup that isn’t FDIC-insured, so that’s an easy pass for me. Be careful.

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