A unit of Cerberus Capital Management last week issued $174 million of debt secured entirely by home equity lines of credit, or HELOCs, according to The Wall Street Journal. It’s a type of mortgage bond that went extinct in the wake of the financial crisis after a reversal in home prices made older versions worth pennies on the dollar.
The issuance got a triple-A rating from four agencies, including Fitch Ratings.
“We are starting to have a lot more creative issuance around mortgage credit,” Neil Aggarwal, head of trading and deputy chief investment officer at Semper Capital Management, told the Journal. “I wouldn’t be surprised if there’s more to follow after this transaction.”
Investors and analysts told the Journal that the Cerberus deal is structured more conservatively than the HELOC bonds that became almost worthless during the financial crisis and that the loans have higher credit quality. One difference between now and then: Lenders are no longer handing out “125 HELOCs,” which were the pre-bust equity loans that exceeded a home’s value by 125% on the assumption that home prices were only going to go up. Those were also known as “no equity” loans.
“Cerberus is entering this corner of the market at a time when many mortgage investors are looking farther afield for opportunities,” the Journal story said. “The firm has been a big buyer of once-delinquent pre-crisis mortgages that borrowers had started making payments on again, known as reperforming loans. The availability of blemished pre-crisis loans has been steadily declining.”
Americans are sitting on $5.7 trillion tappable equity, Black Knight said in an April report. Homeowners in the last quarter of 2018 accessed just $61 billion of their equity, the lowest share in nearly three years.
HELOC use has been declining for nearly three years thanks to rising short-term rates, but that trend may reverse. The Federal Reserve signaled at its meeting last week that a cut to its benchmark rate may be on the horizon, and that will influence the indices used for HELOCs.
In the past, Americans could use HELOCs for cars, vacations or renovations and still get a mortgage-interest deduction, but the new federal tax code that went into effect Jan. 1 restricts the tax benefit to HELOC funds that are spent on home improvement.
“If the use of the HELOC isn’t related to your home, it’s not deductible anymore,” said Keith Gumbinger, vice president of HSH Associates, a mortgage research firm.
Renovation spending this year will probably rise to an all-time high of $353 billion, according to Harvard University’s Remodeling Futures Program. That would be a jump of 5.2% from 2018 when it was $336 billion.