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As the housing market suffers through a drought of home sales and related mortgage originations<\/a> in the current high-rate environment, home prices and home equity continue to climb, helping to spark a revival of another sector<\/a> \u2014 home equity lending and investment.<\/p>\n 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.<\/p>\n 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. <\/p>\n Saluda Grade<\/strong>, a real estate advisory and asset-management firm specializing in alternative lending products in the nonbank sector, and its fintech partner, Unlock Technologies<\/strong>, this week priced the industry\u2019s first rated securitization backed entirely by shared-equity contracts (which Unlock calls HEAs). <\/p>\n That offering, Unlock HEA Trust 2023-1, is slated to close this week. <\/p>\n \u201cThat will be the first-ever rated securitization of home equity agreements,\u201d said Ryan Craft, CEO of Saluda Grade. \u201cThis 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. <\/p>\n \u201c\u2026These [rated offerings] can start to bring in investors like insurance companies, money managers with mutual funds that have ratings constraints, investment banks \u2026 [and more], which will provide better financing on rated bonds.\u201d<\/p>\n The recent Saluda Grade-sponsored rated offering represents the sixth securitization deal since 2021 backed fully by shared-equity contracts \u2014 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. <\/p>\n The initial securitization to be backed entirely by shared-equity contracts,\u00a0Point Securitization Trust 2021-1<\/a>, was a $146 million offering issued in the fall of 2021 by a fintech called\u00a0Point\u00a0<\/strong>and\u00a0Redwood Trust<\/strong>, which is an investor in Point<\/a>.<\/p>\n 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.<\/p>\n Since then, based on bond-rating documents and a report by ratings firm DBRS Morningstar<\/strong><\/a> \u2014 which rated the recent Saluda Grade shared-equity offering \u2014 there has been a total of 20 securitization deals backed by HELOCs and\/or CES valued at about $4.8 billion \u2014 10 of which were issued this year with a total value of some $2.6 billion.<\/p>\n \u201cSo even though the rate [for HELOCs] is 10% [or more], because it’s a smaller balance loan, the payment isn’t as painful,\u201d said John Toohig, head of whole-loan trading on the Raymond James<\/strong> whole-loan desk and president of Raymond James Mortgage Co.<\/strong>\u201cAnd 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. <\/p>\n \u201cAnd 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 \u2014 if there\u2019s an exit, they will come.\u201d<\/p>\n A recent report by global property-information and analytics firm CoreLogic <\/strong>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.<\/p>\n Total home equity nationwide topped $16 trillion as of June, while tappable equity \u2013 the amount that can be accessed after retaining a 20% equity stake \u2013 stood at $10.5 trillion, which is near 2022 peaks, according to Black Knight<\/strong><\/a>\u2019s August 2023 Mortgage Monitor report<\/p>\n \u201cGenerally, if there is increasing home prices [as has been the case], we see an increase in home equity,\u201d said Selma Hepp, CoreLogic\u2019s chief economist. \u201cSo, 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.<\/p>\n \u201cThe 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\u2019s end], compared with the previous quarter, a significant improvement for borrowers who bought when prices peaked in the spring of 2022.\u201d<\/p>\n To tap that home equity opportunity efficiently, however, originators need access to dependable liquidity channels, such as securitization. <\/p>\n \u201cIt’s imperative to have an active and open and well-received securitized-product market for any asset class,\u201d Ryan said. \u201cIt sets up a domino effect [for market activity].”<\/p>\n 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.<\/p>\n Banks continue to dominate the traditional home-equity lending space, with Bank of America<\/strong>, Citizens Bank <\/strong>and PNC Bank<\/strong> ranking at the top of the pack. Two nonbanks, however, rank among the top 10 lenders in the traditional home-equity space \u2014 Spring EQ<\/strong>and Figure Lending<\/strong>, according to a recent report by Inside Mortgage Finance<\/strong>.<\/p>\n \u201cMany nonbank originators, [however], have announced that they are originating or will begin originating HELOCs or closed-end second liens\u201d states a report by the\u00a0Urban Institute<\/strong><\/a>\u00a0released at the start of 2023. \u201cWe have seen public announcements by\u00a0Rocket Mortgage<\/strong>,\u00a0Guaranteed Rate<\/strong>,\u00a0United Wholesale Mortgage (UWM)<\/strong>,\u00a0Pennymac\u00a0<\/strong>and loanDepot.<\/strong><\/p>\n \u201cUnlike banks and credit unions, nonbanks can\u2019t hold these [home equity] loans on their balance sheets. \u2026 In the long run, we anticipate these holdings will be aggregated for securitization as this option is more scalable \u2026 but unless this securitization market develops, second liens will remain a small niche that primarily serves pristine borrowers.\u201d<\/p>\n 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<\/strong> have all been used as collateral in securitization offerings so far this year.<\/p>\n Unlock and an increasing number of other companies like it (such as\u00a0Unison<\/strong>,\u00a0Point<\/strong>, and Hometap<\/strong>) 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.<\/p>\n 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.<\/p>\n 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.<\/p>\n \u201cThrough Aspire, Redwood plans to directly originate HEI [shared-equity contracts] by leveraging the company\u2019s nationwide correspondent network of loan officers, and by establishing direct-to-consumer origination channels,\u201d the company said in announcing the new platform.<\/a> \u201c\u2026Over 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.\u201d<\/p>\n John Arens, managing director and head of HEI at Redwood Trust, describes the market opportunity for shared-equity agreements as \u201csignificant, given the all-time high levels of home equity accumulated over years of home-price appreciation.\u201d<\/p>\n \u201c\u2026Despite the current interest rate environment, we believe the persistent shortage in U.S. housing supply will sustain elevated home prices,\u201d he added. \u201cAspire 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. <\/p>\n \u201cAspire\u2019s 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.\u201d<\/p>\n Another player in the shared-equity space, Hometap, sees the recent\u00a0ratings methodology<\/a> developed for the shared-equity (HEI or HEA) space by DBRS Morningstar as an attractive opportunity for expanding liquidity and deal flow.<\/p>\n \u201cWe are quite excited about the creation of a rated securitization market for home-equity investment contracts,\u201d said Hometap CEO Jeff Glass. \u201cThe 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. <\/p>\n \u201cWe 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.\u201d<\/p>\n 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\u2019t qualify for traditional home equity loans, such as HELOCs or CESs.<\/p>\n \u201cThere\u2019s an enormous market for this, and we\u2019re just scratching the surface,\u201d he said. \u201cThere\u2019s plenty of demand., so it\u2019s just a matter of us getting in front of more customers.\u201d<\/p>\n Unlock also is developing shared-equity offerings for what it calls \u201cHEA Prime,\u201d a product that is designed for homeowners who have higher credit scores. That will put Unlock in direct competition with HELOC originators, Riccetelli added.<\/p>\n \u201cWe’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,\u201d he explained. \u201cWe will have an HEA Prime initiative where we\u2019re actually trying to market to those customers in the future.\u201d <\/p>\n Peter Silverstein, chief of capital markets at Unlock Technologies, said the shared-equity space is \u201crelatively more insulated\u201d from market turmoil, compared with the traditional home equity sector, because shared-equity agreements don\u2019t entail monthly payments or interest expense. He added that about 65% of Unlock\u2019s customers use the proceeds from shared-equity agreements \u201cto actually eliminate debt.\u201d <\/p>\nEquity rich<\/h2>\n
Shared-equity boom<\/h2>\n