MReport June 2021

TheMReport — News and strategies for the evolving mortgage marketplace.

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28 | M R EP O RT FEATURE W ith refinancing volume poised to fall in 2021, originators are starting to look toward alternative means of generating revenue—and home equity loans (HELs) have become one of the best options. Rising home values and a strengthening economy are the ob- vious reasons why. According to a recent CoreLogic report, U.S. home- owners realized a 16.2% increase in home equity last year, representing a combined gain of more than $1.5 trillion, while the average home- owner saw an increase of $26,300. A growing number of homeown- ers will be using that equity for home improvements, paying for a child's college tuition, or to consolidate debt and lower their monthly payments. In its 2020 Home Equity Lending Study released last August, the Mortgage Bankers Association predicted HELs would rebound in 2021, with volume rising 9% over 2020. Another reason the home equity market may expand is rebounding investor appetite for second-lien loans—which practi- cally vanished in the early months of the COVID-19 pandemic. State of the Capital Markets O riginators have a good reason to pay attention to home equity loans now with refinance volumes continuing to decline. According to the MBA's latest projections, mortgage rates are likely to climb to 3.6% by the end of 2021. As rates rise, margins on front-end products are going to drop as well. Thanks to low inventory and rising home values, homeowners not only have more equity in their homes, but the capital markets for second liens have opened back up, which is fueling the creation of new home equity products. However, not every lender has been able to take advantage. Currently, there are only four or five major players in the home equity lending space. While lend- ers can make $10,000 for every purchase loan originated, they only make between $1,000 to $3,000 on home equity loans, so many aren't really paying much attention to this market. In fact, some banks have dropped out of the home equity market complete- ly since last year. Another reason fewer lenders offer home equity products is that it's not an easy market to break into. Capital for HELs and home equity lines of credit (HELOCs) comes from two different sources: Main Street—that is, credit unions and large banks that generally keep these loans on their balance sheets—and Wall Street, which is a very fragmented market and tricky to crack. At the start of the pandemic, the capital market side blew out completely and investors stepped away from everything except agency products. As the economy began to rebound, investors started coming back, where things are now somewhat back to normal. While the demand from investors for second liens hasn't been incred- ibly high, the increase in rates is likely to push up demand, which is going to increase the availability and supply for second liens. Since the market's rebound, several sizable securitizations of home equity and HELOC loans have been made. In September, we saw the largest securitization backed by HELOCs since the last housing crisis, totaling $308 mil- lion. In December, we contributed to a $146 million securitization of HELs to market. Other factors driving investor appetite in second-lien products are attractive yields. Second-lien loans are more of a credit prod- uct, so they don't track against 10-year bonds the way purchase loans do. For true second-lien loans, for example, one would look at shorter term bonds like seven-year bonds, which are 1.4% right now. In the two securitiza- tions mentioned above, the yield for A-1 loans—the large tranche in both deals—was 3.0% for HELs and 3.5% for HELOCs. Investor Concerns Remain I nvestors are growing comfort- able with the idea that things are returning to normal, but many unknowns remain. One is the COVID-19 vaccine rollout, which currently looks promising. That could change if not enough people get vaccinated and we see another huge spike in cases during the spring and summer months. Many investors are still waiting to see what the impact will be for jobs, the stock market, and the overall economy. Another positive impact on investor outlook has been the government's proactive response to the COVID-19 pandemic. Letting borrowers suspend mort- gage payments for six months or more and then giving them the opportunity to modify their loans has kept massive defaults at bay. Meanwhile, stimulus checks are giving many people who can afford to keep making mortgage payments an opportunity to pay down debt and shore up their financial position, making them better credit risks. To a certain extent, investor op- timism toward second mortgages is tracking with the reopening of the economy. The biggest con- cerns investors have with home equity products are home price volatility and the possibility that borrowers are overstretching their budgets. However, today's market Against the Tide Returning investor appetite is fueling home equity lending. By Saket Nigam

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