NEW YORK, June 11 (IFR) - Banks are mulling ways to
securitize US home equity lines of credit - popular loans that
suffered in the financial crisis but are coming back into vogue
as house prices rise.
Lenders like the higher yields they can charge for the
loans, known as HELOCs, but not the high capital provisions they
require to satisfy Basel III rules.
So one option is to take the loans off balance sheet and
bundle them into an RMBS - a common tactic before the crisis
that created a US$100bn-plus HELOC securitization market back in
the 2007 heyday.
While HELOCs dropped to cents on the dollar after the
housing crash, loan volumes are now on the rise, driving hopes
of a HELOC-backed RMBS comeback that could be spearheaded by
lenders such as Wells Fargo, Bank of America, which acquired
Countrywide, and JP Morgan Chase.
"For now, it's a balance sheet product going to
high-net-worth individuals," a residential lender in the sector
But the lender said would-be issuers are looking at how they
can get to the securitization stage.
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.
Rating agencies have yet to receive inquiries from HELOC
lenders about rating new HELOC-backed RMBS structures, but they
will likely be cautious.
Critics say HELOCs lure borrowers into drawing out cash
against their properties at low initial rates, which can leave
them in a vulnerable position if rates rise to unsustainable
Another problem is having enough loans to bundle together.
Some homeowners have been keen to take out a second line of
credit against their homes as values have risen, resulting in
US98.8bn of new lines opening in 2013 - a 26% year-on-year
increase, according to Equifax.
But last year's origination volume was still only about a
third of what it was in 2007.
It's often cheaper for homeowners to refinance a mortgage at
record low rates than to add an extra loan, one banker said.
He said the sector is still largely focused on getting the
first mortgage, prime jumbo RMBS market working.
Still, some market participants are hopeful of more HELOC
growth ahead, and demand from borrowers whose home valuations
are still under water is seen as a driving force.
There are 6.3m mortgaged US homes still stuck in negative
equity territory as of the first quarter, according to report
last week from CoreLogic.
Though that's an improvement from the 6.6m figure from the
prior quarter, many people are still not in a position to
refinance at current low rates or to make a profit by selling
"Based on what I see, people are staying where they are -
spending money on their house," said Chris Gavin, a partner at
Perkins Coie. "HELOCs make sense for a variety of people."
Even if investors can be won over, and loan volumes do
balloon, banks are still mindful of the risks following
high-profile failures of previous dominant players like
Countrywide and billion dollar lawsuits that tarnished the
Banks that opted not to securitize HELOCs, leaving them
instead on their balance sheet, also suffered losses estimated
at US$77bn 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.
"If nothing is left over at foreclosure, it is a total
loss," said Kunkle.
But the hope of offloading HELOCs from balance sheets is
likely to prove too tempting eventually, especially as the
average profit lenders make on first mortgages has steadily
The fourth quarter saw a new low of US$150 per loan per
quarter, down from US$391 in the prior quarter, according to
data from the Mortgage Bankers Association.
Meanwhile, efforts are under way to make this a safer
Wells Fargo in May said it would change its HELOC business
by charging interest or a minimum payment each month that would
pay down principal.
Another safeguard is that banks are now only making HELOC
loans to customers they already know.
The strategy is expected to hold up better than pre-crisis
practices, where third-party originators pushed as many
borrowers as possible into HELOCs, regardless of whether that
type of loan was suitable or not.
"There is zero correspondent HELOC lending going on now,"
(Reporting by Joy Wiltermuth; Editing by Natalie Harrison and