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Home equity products light up a dark housing market

HELOCs, closed-end second mortgages and shared-equity contracts are flooding the zone as first-lien originations dry up

As the housing market suffers through a drought of home sales and related mortgage originations in the current high-rate environment, home prices and home equity continue to climb, helping to spark a revival of another sector — home equity lending and investment.

Between the summer of 2019 to date, there have been at least 26 securitization deals backed by home equity products valued in total at some $6.1 billion, according to a review of bond-rating and industry reports. Nearly half of those offerings, in terms of count and value, have played out this year, however.

The home equity products involved include home equity lines of credit (HELOCs), closed-end second mortgages (CESs) and shared-equity contracts. In fact, for the latter product, also referred to as home equity investments (HEIs) or home equity agreements (HEAs), the market is poised to expand even further. 

Saluda Grade, a real estate advisory and asset-management firm specializing in alternative lending products in the nonbank sector, and its fintech partner, Unlock Technologies, this week priced the industry’s first rated securitization backed entirely by shared-equity contracts (which Unlock calls HEAs). 

That offering, Unlock HEA Trust 2023-1, is slated to close this week. 

“That will be the first-ever rated securitization of home equity agreements,” said Ryan Craft, CEO of Saluda Grade. “This is a watershed moment for many different reasons as now these [HEAs] can start to become more of a mainstream asset class that a significant number of investors will want to participate in. 

“…These [rated offerings] can start to bring in investors like insurance companies, money managers with mutual funds that have ratings constraints, investment banks … [and more], which will provide better financing on rated bonds.”

The recent Saluda Grade-sponsored rated offering represents the sixth securitization deal since 2021 backed fully by shared-equity contracts — valued in total at some $1.3 billion, according to offering documents. Three of those deals involved Saluda Grade and Unlock Technologies (the HEA originator), including the most recent and first rated offering in the sector. 

The initial securitization to be backed entirely by shared-equity contracts, Point Securitization Trust 2021-1, was a $146 million offering issued in the fall of 2021 by a fintech called Point and Redwood Trust, which is an investor in Point.

The news is just as positive in the more traditional home equity sector of HELOCs and CESs. In the case of HELOCs, securitization deals essentially stopped for about a decade in the wake of the global financial crisis, starting up again slowly by 2019.

Since then, based on bond-rating documents and a report by ratings firm DBRS Morningstar — which rated the recent Saluda Grade shared-equity offering — there has been a total of 20 securitization deals backed by HELOCs and/or CES valued at about $4.8 billion — 10 of which were issued this year with a total value of some $2.6 billion.

“So even though the rate [for HELOCs] is 10% [or more], because it’s a smaller balance loan, the payment isn’t as painful,” said John Toohig, head of whole-loan trading on the Raymond James whole-loan desk and president of Raymond James Mortgage Co.“And that’s I think what the driver is, so if rates stay higher, which it looks like they’re going to [now above 7%], I actually see that as a positive [for the HELOC] market. 

“And now there is a vibrant secondary market, and that brings more confidence to originators that if they make the loan, they can sell the loan. I think the last time we talked [at the start of the year] I said if they build it [a secondary market outlet], they [originators] will come — if there’s an exit, they will come.”

Equity rich

A recent report by global property-information and analytics firm CoreLogic states that U.S. homeowners saw home equity increase 1.7% year over year as of the end of the second quarter of this year.

Total home equity nationwide topped $16 trillion as of June, while tappable equity – the amount that can be accessed after retaining a 20% equity stake – stood at $10.5 trillion, which is near 2022 peaks, according to Black Knight’s August 2023 Mortgage Monitor report

“Generally, if there is increasing home prices [as has been the case], we see an increase in home equity,” said Selma Hepp, CoreLogic’s chief economist. “So, I do anticipate in the third quarter to see us probably almost back to the [home equity] peak, where we were in the second quarter of last year.

“The 5% overall increase in home prices since February [2023] means that the average U.S. homeowner has gained almost $14,000 [in home equity as of the second quarter’s end], compared with the previous quarter, a significant improvement for borrowers who bought when prices peaked in the spring of 2022.”

To tap that home equity opportunity efficiently, however, originators need access to dependable liquidity channels, such as securitization. 

“It’s imperative to have an active and open and well-received securitized-product market for any asset class,” Ryan said. “It sets up a domino effect [for market activity].”

In addition to its deal facilitation in the shared-equity sector, Saluda Grade also has sponsored two HELOC/CES securitizations this year backed by loans originated through Spring EQ in one case and Figure Lending in the other.

Banks continue to dominate the traditional home-equity lending space, with Bank of AmericaCitizens Bank and PNC Bank ranking at the top of the pack. Two nonbanks, however, rank among the top 10 lenders in the traditional home-equity space — Spring EQand Figure Lending, according to a recent report by Inside Mortgage Finance.

“Many nonbank originators, [however], have announced that they are originating or will begin originating HELOCs or closed-end second liens” states a report by the Urban Institute released at the start of 2023. “We have seen public announcements by Rocket Mortgage, Guaranteed RateUnited Wholesale Mortgage (UWM), Pennymac and loanDepot.

“Unlike banks and credit unions, nonbanks can’t hold these [home equity] loans on their balance sheets. … In the long run, we anticipate these holdings will be aggregated for securitization as this option is more scalable … but unless this securitization market develops, second liens will remain a small niche that primarily serves pristine borrowers.”

It appears that securitization market has arrived. Home equity loans originated by Rocket Mortgage, UWM and Pennymac, loanDepot, Spring EQ, Figure Lending and a nonbank called Achieve Home Loans have all been used as collateral in securitization offerings so far this year.

Shared-equity boom

Unlock and an increasing number of other companies like it (such as Unison, Point, and Hometap) are part of an emerging business segment 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 (an HEA or HEI) in which homeowners are provided cash upfront in return for providing the investor, such as Unlock, a share of the equity in their homes.

At the end of the contract period (10 years in the case of Unlock) the homeowner must settle the terms through the sale of the home, through a refinancing, a direct payment or potentially rolling into a new HEA contract.

As a sign of the boom in this sector, Redwood Trust, an early entrant in the HEI market, recently launched a new HEI origination platform called Aspire.

“Through Aspire, Redwood plans to directly originate HEI [shared-equity contracts] by leveraging the company’s nationwide correspondent network of loan officers, and by establishing direct-to-consumer origination channels,” the company said in announcing the new platform. “…Over the past four years, Redwood has purchased some $350 million in HEI contracts to date, co-sponsored the first-ever securitization backed entirely by HEI contracts in 2021; and obtained a $150 million dedicated HEI financing facility in 2022.”

John Arens, managing director and head of HEI at Redwood Trust, describes the market opportunity for shared-equity agreements as “significant, given the all-time high levels of home equity accumulated over years of home-price appreciation.”

“…Despite the current interest rate environment, we believe the persistent shortage in U.S. housing supply will sustain elevated home prices,” he added. “Aspire is focused on helping prime and near-prime consumers who may have a range of traditional financing options available to them, such as closed-end home equity loans or home equity lines of credit but prefer an HEI because it has no monthly payment obligation. 

“Aspire’s product offering is also structured to provide homeowners with the flexibility to potentially refinance into traditional debt products in the future in the event interest rates moderate.”

Another player in the shared-equity space, Hometap, sees the recent ratings methodology developed for the shared-equity (HEI or HEA) space by DBRS Morningstar as an attractive opportunity for expanding liquidity and deal flow.

“We are quite excited about the creation of a rated securitization market for home-equity investment contracts,” said Hometap CEO Jeff Glass. “The establishment of marketable securities and a bond market for HEI is already attracting more capital into the space, which augurs further opportunity to help provide our HEI financing alternative to homeowners. 

“We have a sizable portfolio in market and are working with various capital market participants to determine the timing for when we will begin our securitization-issuance program.”

Jim Riccitelli, CEO of Unlock Technologies, said there is about $1.5 trillion to $2 trillion in tappable equity in the homeowner market segment that doesn’t qualify for traditional home equity loans, such as HELOCs or CESs.

“There’s an enormous market for this, and we’re just scratching the surface,” he said. “There’s plenty of demand., so it’s just a matter of us getting in front of more customers.”

Unlock also is developing shared-equity offerings for what it calls “HEA Prime,” a product that is designed for homeowners who have higher credit scores. That will put Unlock in direct competition with HELOC originators, Riccetelli added.

“We’re looking forward to a multiyear period where the cost of capital drops [assisted by an active securitization market], and that will make us better able to compete in the higher FICO [credit score] cohort,” he explained. “We will have an HEA Prime initiative where we’re actually trying to market to those customers in the future.” 

Peter Silberstein, chief of capital markets at Unlock Technologies, said the shared-equity space is “relatively more insulated” from market turmoil, compared with the traditional home equity sector, because shared-equity agreements don’t entail monthly payments or interest expense. He added that about 65% of Unlock’s customers use the proceeds from shared-equity agreements “to actually eliminate debt.” 

As further evidence of investor interest in the space, Craft said Saluda Grade recently secured a $100 million line of credit from Texas Capital Bank and earlier this year it lined up a $300 million line from Barclays Bank PLC, both of which will be used to purchase and later securitize shared-equity contracts originated by Unlock Technologies.

“Saluda Grade now has financing facilities from both Barclays and Texas Capital Bank,” Craft said. “The headline number is $400 million, but they have an appetite for more than that.”

Looking forward

Riccitelli said Unlock’s shared-equity agreement “origination volume is growing very rapidly.”

“We have been seeing 10% to 20% increases month over now for quite a number of months in a row,” he stressed. “…The fact that we now have investment-grade rated securitizations here will bring in more investors, like insurance companies, and our cost of capital will go down.

“And when interest rates go down, our cost of capital will go down further, and we will lower our price to the consumer.”

On the traditional home-equity lending front, Raymond James’ Toohig said 2023 so far is “easily our best year in trading HELOCs in over a decade.”

“The mortgage businesses is down sharply but the HELOC business is up sharply,” he added. “It’s all new production, it’s all brand-new paper, and it’s usually monthly or quarterly adjusting, so it stays at a current market rate. 

“If housing values hold, employment holds and builders don’t step up [to greatly expand housing inventory], it [2024] will be a banner year for HELOCs.”

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