Hot home-equity market fueling securitization deals

Fintech Unlock, investment firm Saluda Grade team up for private-label offering backed by shared-equity contracts

New York-based Unlock Technologies, a fintech operating in the shared-equity market, and real estate investment firm Saluda Grade, have closed a $180 million private-label securitization (PLS) backed entirely by Unlock-originated residential home-equity agreements (HEAs).

The PLS transaction, called UNLOK 2022-1, involves $144 million of unrated senior Class A notes, $18 million of mezzanine Class B securities and $18 million of mezzanine Class C securities.

“The senior debt offering in the securitization was oversubscribed, with participation across mutual funds, credit funds, banks and asset managers,” Unlock’s announcement of the deal states. “All investors in the transaction were first-time participants in securitizations backed entirely by home-equity agreements [HEAs].”

Unlock’s HEA contracts typically feature 10-year maturities and involve a 3% origination fee based on Unlock’s original investment, which is not a loan. The general premise is that Unlock provides the homeowner with cash upfront — normally 10% of the home’s current value. In exchange, the homeowner inks a contract providing the company with a slice of the homeowner’s future equity. That future share is normally 17%, collected when the home is sold, refinanced or via a buy-out of the contract, according to Unlock’s website.

“Unlock directly addresses consumers’ desire to improve their financial situations by accessing their largest asset, their home equity,” says Unlock CEO Jim Riccitelli. “As the HEA asset class achieves mainstream adoption from traditional financing sources, we will continue to provide creative financing solutions to many thousands of deserving families that cannot qualify for traditional home-finance products like HELOCs [home-equity lines of credit] and cash-out refinance loans.”

Last year, Unlock and Salude Grade teamed up for their initial PLS offering, GRADE 2021-WL1, a $153 million unrated securitization backed, in part, by Unlock-originated HEA contracts along with other mortgage assets acquired by the securitization trust.

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A combination of fast-rising home values and the fact that nearly two-thirds of borrowers with at least some home equity have mortgage rates below 4% — and would not benefit from refinancing — is helping to propel a resurgent market for tapping into home equity. The interest rate for a 30-year, fixed-rate mortgage averaged 6.47% on Tuesday, Sept. 21, according to Mortgage News Daily.

Black Knight reports in its Mortgage Monitor Report for the second quarter that the amount of tappable home equity nationally hit $11.5 trillion in the second quarter — after accounting for homeowners retaining at least 20% equity. That figure is up by around $500 billion from the first quarter and $2.3 trillion year over year.

San Francisco-based fintech company Unison is another shared-equity company taking advantage of the hot home-equity market. Earlier this year Unison completed a $443 million private-label offering backed by its shared-equity contracts, called residential equity agreements, or REAs. 

Unison, launched in 2004, joins another California-based fintech competitor, Point, in pursuing efforts to tap the secondary market to create more liquidity for the financing of shared home-equity contracts. This past fall, Palo Alto-based Point partnered with Redwood Trust — a Mill Valley-California-based real estate investment trust — to complete a $146 million securitization deal backed by contracts that are similar to REAs. 

Traditional home-equity lending in general is on a roll this year, with the combined volume of home-equity lines of credit (HELOCs) and traditional closed-end home equity loans up 47% from January to May of 2022, compared with the same period last year.

Nearly $69 billion in HELOC credit limits and $27 billion in closed-end home-equity loans were originated over the first five months of 2021. That compares with $101 billion in HELOC volume and $38 billion in closed-end home-equity originations over the same period this year, according to a new report by the Urban Institute’s Housing Finance Policy Center.

Securitizations backed by home-equity loans or shared-equity agreements, however, are still relatively rare to date. A recent DBRS Morningstar report notes that from 2019 to the present, a total of only nine residential mortgage-backed securities (RMBS) offerings valued at $2.6 billion have been completed involving HELOCs as collateral.

One of those deals made its way to the market this year. That deal, dubbed GRADE 2022-SEQ2, was a $198.6 million RMBS offering also sponsored by Saluda Grade. It was backed by 2,327 loans that included a mix of both closed-end second-lien mortgages and HELOCs, according to a presale report by Kroll Bond Rating Agency (KBRA).

The loan originator for the RMBS offering was Spring EQ LLC, which focuses on originating second-lien mortgages, including closed-end home equity loans and HELOCs. The initial note purchaser for the RMBS offering, which closed in April 2022, was Raymond James & Associates, according to the KBRA report.

“More potential issuers have looked to add HELOC securitization funding this year, especially given the dramatic rise in home values providing increased home-equity availability,” the DBR Morningstar report notes.

Increasing demand from institutional capital also is helping to bring added financing and liquidity to the shared-equity market, according to Ryan Craft, CEO of Saluda Grade. That is expected to result in an uptick in securitization deals involving share-equity contract assets in the future.

“Our mission is to programmatically issue Unlock securitizations, dramatically increasing available liquidity for the American homeowners that need it most,” Ryan said.

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