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Is the HELOC-backed RMBS coming back?

Banks looking for new ways to offer HELOC securitizations

In March, capital markets advisory group MountainView Capital reported that investors were hungry for more secondary deals involving home equity lines of credit and other second lien mortgages.

"Second lien trading activity during 2013 was light and down from 2012 levels, both in total unpaid principal balance and number of transactions,” said Jonas Roth, a managing director at MountainView Capital Group at the time. "This was primarily due to a finite number of sellers, and 2014 looks like more of the same."

Now, it seems that those investors just may get their wish. According to a Reuters report from earlier this month, originators are working to determine if HELOC securitizations are viable in today’s market, considering the rules that govern the loans.

Regardless of how the deal is structured, investors may still be wary of the potential for loss.

Getting investors on board is a major hurdle, especially as HELOCs suffered a 12-month loss severity rate of 86.78% as of June, according to data firm Intex.

Jonathan Kunkle, who heads LenderLive Network's document services arm, said originators are exploring securitization, but believes this time around issuers will need to retain some risk to make a HELOC-backed RMBS palatable to the buy side.

Kunkle is helping banks – and some non-depository lenders – dust off their home equity lending platforms to satisfy new consumer protection and regulatory rules.

Reuters reports that ratings agencies have not received inquiries from HELOC lenders about rating new HELOC-backed RMBS offerings.

But banks that didn’t securitize their HELOCs have seen big losses.

Banks that opted not to securitize HELOCs, leaving them instead on their balance sheet, also suffered losses estimated at $77 billion since the financial crisis, according to Trepp data, mainly because little trickles down to this type of second lien if a borrower defaults on its first mortgage.

In May, Wells Fargo (WFC) took the first steps towards making HELOCs safer for consumers and the bank itself, by requiring most new customers to pay principal and interest over the life of the loan.

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