In recent years, home equity has come to be known as a portfolio product, with little or no secondary market potential. From time to time, a security would come to market backed by either HELOCs or HE Loans, but the deals would usually be small and far between. But this hasn’t always been the case. Prior to the mortgage crisis, there was a relatively active securitization market for these products. And now there are some signs that this market may be returning.
For example, home equity securitization was a big topic of discussion at the structured finance industry’s major conference, SF Vegas in March. Writing about the conference in his company’s blog, Pete Pannes, Chief Business Officer at Clayton noted: “There were also signs that HELOC securitization might be coming together after all. One large money center bank, for example, is planning to securitize $12 billion in HELOCs, perhaps as many as 90,000+ lines.”
“Meanwhile, some large mortgage banks, like Rocket, UWM and loanDepot, are originating these assets to securitize, as are specialty lenders, like Figure and Spring EQ. Large investors, like PennyMac, are also actively looking at this asset class. At least two subservicers are now subservicing both fixed and open-end home equity loans.”
Similarly, Asset Backed Alert, the leading structured finance newsletter, quoted one issuer at SF Vegas as saying, “Everybody wants to talk about home equity deals all the time.” The newsletter also noted that issuers may be preparing to bring $5 to $ 8 billion in home equity deals to market this year, up from about $1 billion in 2022.
Achieve’s first AAA-rated securitization, backed by home equity lines of credit originated by its affiliate, Achieve Loans, is recent example of a well-received deal coming to market.
How big was the home equity securitization market in its heyday? Asset Backed Alert reported that over a 10-year period from 1996 through 2007 more than $159 billion in home equity securities were issued.
The high level of second-lien defaults during the financial crisis of 2008 as well as the realization that home equity could turn into negative equity soured the secondary market HELOC securitizations.
What’s changing the market’s opinion is the level of demand for home equity products: TransUnion for example, expects home equity originations to grow by nearly 25% this year, and that’s after a 40% jump in 2022.
An active secondary market for home equity would give non-banks a way to get into the game. It would also inject liquidity into the market at a time when some portfolio lenders – like community banks and credit unions—are becoming reluctant to put less-liquid assets on their balance sheets.
Securitization channels for home-equity products are just starting to catch up to the growing demand for home equity-backed securities. This is good news for lenders, homeowners, and investors.
Let’s hope it continues.