The demand for home-equity loans, particularly home-equity lines of credit (HELOCs) as well as shared-equity investment products, is now stronger than at any time since before the global financial crisis some 15 years ago.
Securitization channels for those home-equity products, however, are only now starting to catch up to the growing demand for them. Homeowners collectively nationwide now have more than $10 trillion in tappable equity (equity beyond a 20% cushion) tied up in their properties, according to the Black Knight Mortgage Monitor. Those securitization outlets for home-equity products are critical to ensuring liquidity for ongoing operations.
“Securitization of HELOCs had been a small part of the RMBS [residential mortgage-backed securities] market in the pre-financial crisis period, but issuance was still relatively commonplace until 2007,” states a fall 2022 DBSR Morningstar report focused on the securitization market for HELOCs. “After that time, HELOC production waned as defaults spiked and home values plummeted, and HELOC securitizations effectively stopped for nearly a decade.
“Eventually, a number of small deals trickled their way into the market starting in 2019, More potential issuers have looked to add HELOC securitization funding [in recent months], especially given the dramatic rise in home values providing increased home-equity availability.”
A HousingWire analysis of bond-rating report data and information provided by industry experts shows that between 2019 and March 28 of this year, there were at least 17 private-label securitization deals involving HELOCs and/or closed-end second-lien (CES) home-equity loans and separately shared-equity contracts. Those 17 deals were backed by home-equity collateral valued in total at $3.9 billion.
Eight of those securitization deals have gone to market since 2022, including three so far in 2023. Those include a $279 million combination HELOC/CES deal issued through the conduit Towd Point HE Trust 2023-1; a $237 million HELOC-backed offering, FIGRE Trust 2023-HEI, sponsored by fintech Figure Lending; and a $153 million offering, ACHM Trust 2023-HE1, sponsored by Achieve Home Loans — which also originated the HELOCs serving as collateral for the transaction.
The Towd Point deal involved HELOCs as well as CES loans originated by nonbanks Rocket Mortgage and Spring EQ. The Towd Point offering, according to a Kroll Bond Rating Agency (KBRA) report, closed in early March, prior to the March 10 collapse of Silicon Valley Bank (SVB). In the FIGRE offering, per a bond-rating report released March 28 by DBSR Morningstar, Figure Lending was the originator of the HELOCs in the collateral pool, with Homebridge Financial Services, Movement Mortgage and Guaranteed Rate also contributing to the HELOC collateral pool.
Nick Smith, founder and CEO of Minneapolis-based private-equity firm Rice Park Capital Management, explained that the consumer is now worse off every day “as inflation outpaces their income growth.” He said if those consumers want to maintain the same lifestyle, they have few options now.
“The only way to do that is to either draw down savings or extract part of their net worth from some other assets they hold [such as a home],” Smith added. “Savings rates have declined to all-time lows and credit-card utilization is increasing significantly.
“I think that trend is going to continue, and you’re going to see a lot of supply of home-equity lending in the market in the future because the consumers want it. And I think fixed-income investors are going to say, ‘OK, there’s volume there,’ and as long as it’s priced appropriately, they’re going to want to participate.
“I think that’s going to be a pretty significant burgeoning market.”
The need for capital-market outlets, such as securitizations, for home-equity loans is particularly acute for nonbanks that are dependent on short-term revolving lines of credit, called warehouse lines, for cash flow. It’s also true for fintech firms that are focused on expanding their reach into the shared-equity investment market.
“Nonbanks can’t originate it, or won’t originate it [HELOCs], if they don’t know they have securitization to dump it into, or if they … need a bank partner that has agreed to purchase the loans on a forward-flow basis,” said John Toohig, head of whole-loan trading at Raymond James in Memphis. “… Most nonbanks just have warehouse lines, and since they don’t have the confidence to turn around and immediately sell it [HELOC loans], many may be afraid to jump into the HELOC market.”
The most common HELOC Toohig is seeing, he said, is “a 10-year, IO [interest-only] 20-year amortization, with a lien secured in a second position.” Toohig added that the interest rate on a HELOC is normally variable, “usually prime, plus 1.5 to 2 points.”
The market tumult sparked by the recent downfall of SVB, the second largest bank failure in U.S. history, bled into the secondary market as well and disrupted private-label securitizations generally in mid-March, market experts said. In addition, overall demand for home-equity loans slowed in the final months of 2022 as 30-year fixed rate interest rates moved into the 7% range in late October and into November.
“We’ve already seen slowdown in issuance across [securitization] sectors actually, so it’s not just not just mortgages,” said David Petrosinelli, a New York-based senior trader with InspereX, a tech-driven underwriter and distributor of securities that operates multiple trading desks around the country. “I just think we’re kind of likely to see maybe a little bit more of an extended period of time where we just don’t see a lot of deals.
“But ultimately, though, like everything else, there’s a season, and [those home-equity securitizations] will come back.”
Traditional home equity loans
Rob Barber, chief executive officer at real-estate data firm ATTOM, said the $60.1 billion in fourth-quarter 2022 HELOC origination volume was up 27.4% from the fourth quarter of 2021. Despite last year’s fourth-quarter origination dip, he said HELOCs still represented 20.7% of all fourth-quarter 2022 loans – nearly five times the 4.6% level for the first quarter of 2021, according to ATTOM.
Interest rates, though still volatile, have since receded from the 7%-plus high mark for a 30-year fixed rate mortgage reached late last year. As of late March, they were at least half a percentage point lower, according to Freddie Mac’s most recent market survey. The borrower demand for home-equity products for the balance of this year is expected to continue to grow — barring any future market jolts, industry experts say.
Among the nonbanks that offer HELOCs and/or closed-end second-lien (CES) home-equity mortgage products are Rocket Mortgage, Guaranteed Rate, United Wholesale Mortgage, Homebridge, Movement Mortgage and loanDepot. In fact, Rocket Mortgage was a major originator of CES loans for the first second home-equity mortgage private-label securitization this year — the Towd deal that closed in early March and involved loans seasoned an average of three months, according to KBRA.
That deal involved a mix of HELOC and CES loans, with home-equity lender Spring EQ originating the HELOCs for the securitization transaction. Rocket originated 47% of the CES loans for the deal, with CES loans accounting for 69% of the total collateral pool by count. The $279.1 million offering was sponsored by FirstKey Mortgage — a securitization and asset-management firm.
Among the most active lenders in the home-equity loan space are Spring EQ and Figure — founded by entrepreneur Mike Cagney, also the founder of SoFi. Another active player in the HELOC space is Achieve Home Loans, a real estate finance company under the umbrella of consumer debt-settlement provider Freedom Financial Network Funding.
Those three lenders originated the bulk of the home-equity loans for 10 of the 13 HELOC/CES securitization offerings since 2019 — the first year since the global financial crisis that the home-equity private-label market began to re-emerge. The 13 deals — including a total of six since 2022 — involved aggregate HELOC and/or CES loan collateral of nearly $3 billion, HousingWire’s analysis shows.
Five of those securitization deals, with loans originated by Figure or Spring EQ, were sponsored by Saluda Grade, a New York-based real estate advisory and asset-management firm specializing in alternative lending products in the nonbank sector. Those private-label securitizations were offered through Saluda Grade’s conduit called GRADE.
“It makes a lot of sense for homeowners that are no longer able to tap their home equity via first-lien cash-out refi [because of high rates] to now seek a second-lien home-equity instrument, either debt or equity, to be able to unlock their available home equity,” said Ryan Craft, CEO of Saluda Grade. “We anticipated and would hope that there would be [increased] securitizations in Q2 or by the summer.”
Shared equity contracts
Craft said Saluda Grade also recently secured a $300 million line of credit from Barclays Bank PLC that will be used to purchase and later securitize shared-equity contracts originated by a fintech partner called Unlock Technologies.
“Saluda is the borrower, and they face Barclays,” Craft explained. “It’s a traditional investment-banking aggregation-to-securitization line that has a little more term than the standard short-term aggregation line.
“The mission of all the parties is really to help grow Unlock’s origination volume and help Saluda aggregate that production toward more actively issued securitizations.”
Fintechs like Unlock Technologies and other companies similar to it (such as Unison and Point) are part of an emerging sector in the home-equity space that serves borrowers who may not want or qualify for a traditional home-equity product like a HELOC. Instead, they offer homeowners a product called a shared-equity contract (also referred to as a home-equity investment, or HEI, contract) in which homeowners are provided cash upfront in return for a share of the equity in their homes that is monetized when the home is refinanced or sold.
Two of the four shared-equity contract securitization deals since August 2021 were sponsored by Saluda Grade, with Unlock Technologies originating the HEI contracts that served as collateral in those deals. One of the other two shared-equity contract securitizations issued over the same period was sponsored by Unison and the other by Redwood Trust — through Point, in which Redwood is an investor.
In the final quarter of 2022, Redwood set up a $150 million borrowing facility to help finance HEI contracts, according to its filings with the U.S. Securities and Exchange Commission. The real estate investment trust, via its venture-investment affiliate, RWT Horizons, also has invested in two HEI originators: Point and Vesta Equity.
“There are a number of players in the space that have been investing in HEIs,” said Dash Robinson, president of Redwood Trust. “There’s definitely room for that group of investors to deepen and, as the market continues to grow and scale, deepening your investor base becomes easier as more investors see the opportunity to put meaningful amounts of capital to work accretively.”
Brian Hale, founder and CEO of California-based consultancy Mortgage Advisory Partners, agrees that home-equity lending is primed to grow in the year ahead, given the current climate of high interest rates — relative to the large swath of homeowners locked into very low rates on mortgages closed prior to last year’s rate run-up. Hale also cautions that even so, “it’s not a magic bullet.”
“It’s adding another lending program, but it isn’t going to replace mortgage lending in terms of revenue for mortgage companies,” he stressed. “But yes, if they can do it right and not put themselves in harm’s way, and can continue to be prudent as lenders, they can make some money at it.”