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With interest rates near their historic lows and with real estate prices continuing to climb, homeowners seem increasingly eager for home equity lines of credit (HELOC) to borrow a portion of the increasing equity in their homes. HELOC production is filling a larger portion of lenders' balance sheets. As a result, lenders are increasingly looking to the securitization markets to provide financing for these loans and to reduce their exposure to these first and second trust deeds. In this article, we will look at this market and discuss some issues securitizers have faced along with how they have addressed these issues.
HELOC securitization has usually taken the form of wrapped senior/subordinated transactions. In such deals, an insurance company (usually an "AAA" rated monoline bond insurer) guarantees the principal and interest on the senior bonds. The issuer typically retains the subordinated interests. Recently, some institutions have considered trying to securitize these loans under the REMIC (Real Estate Mortgage Investment Conduit) rules,* which will allow for more creativity in structuring the bonds to meet investor demands and hopefully enhance execution (more cash received on sale of the bonds).
These securitizations are structured as revolvers. This allows principal payments received in the early years to be reinvested in new loans or additional draws by customers on current loans (draws) during the revolving period. The revolver structure lengthens the duration of the bonds sold to investors. It also prevents the prepayments on the loans from paying off the bonds as fast as in a traditional term securitization where all prepayments go to pay down the bonds. The new loans or draws purchased by the trust during the revolving period are typically considered to be new loan sales during the period when they are transferred, and issuers should consider the operational accounting aspects prior to closing the transaction.
While securitizations provide the financing to originate more of these loans, they also add complexity to the issuer's balance sheet. An issuer also may securitize based on risk-based capital rules for banks since there is 100% risk weighting for HELOCs with LTVs above 80% and more onerous capital treatment for loans with LTVs above 90%.
Issuers that securitize convert loans primarily into cash along with the following typical retained interests:
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