Based in New York unlock technologiesa fintech and real estate investment company active in the shared equity market Saluda classhave completed a $180 million Private Label Securitization (PLS) transaction fully backed by Residential Home Equity (HEAs) arrangements initiated by Unlock.
The PLS transaction, dubbed UNLOK 2022-1, includes $144 million in unrated senior Class A notes, $18 million in Class B mezzanine securities and $18 million in Class B mezzanine securities C
“The senior debt offering in the securitization was oversubscribed, with participation from mutual funds, debt funds, banks and asset managers,” Unlock’s announcement of the transaction said. “All investors in the transaction were first-time participants in securitizations fully backed by home equity agreements [HEAs].”
Unlock’s HEA contracts are typically 10-year terms and include a 3% service fee based on Unlock’s original non-loan investment. The general premise is that Unlock provides the homeowner with cash up front – typically 10% of the home’s current value. In return, the homeowner signs a contract that provides the company with a portion of the homeowner’s future equity. This future share is typically 17% and is collected upon sale, refinancing or buyout of the contract, according to Unlock’s website.
“Unlock speaks directly to consumers’ desire to improve their financial situation by accessing their greatest asset, their home,” said Jim Riccitelli, CEO of Unlock. “As the HEA asset class becomes more widely embraced by traditional financing sources, we will continue to provide creative financing solutions to many thousands of deserving families who cannot qualify for traditional home financing products such as HELOCs [home-equity lines of credit] and Payout Refinancing Loans.”
Last year, Unlock and Salude Grade partnered for their first PLS offering, GRADE 2021-WL1, a $153 million unrated securitization partially backed by Unlock-originated HEA contracts along with other mortgage assets is acquired by the Securitization Trust.
A combination of rapidly 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 fuel a resurgent market for home equity development. According to Mortgage News Daily, the interest rate on a 30-year fixed-rate mortgage averaged 6.47% on Tuesday, September 21st.
Black Knight reports in its second-quarter Mortgage Monitor report that the amount of vulnerable home equity reached $11.5 trillion nationwide in the second quarter — after accounting for homeowners retaining at least 20% equity. That number is up about $500 billion from the first quarter and up $2.3 trillion year over year.
Fintech company from San Francisco harmony 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, known as Residential Equity Agreements, or REAs.
Unison, which was founded in 2004, joins another California-based fintech competitor, Point, while continuing efforts to enter the secondary market to provide more liquidity to finance co-op contracts. Last fall, Palo Alto-based Point partnered with Redwood Trust — a real estate investment trust based in Mill Valley, California — complete a $146 million securitization transaction backed by contracts similar to REAs.
Traditional home equity loans are generally on the rise this year, with the combined volume of home equity lines of credit (HELOCs) and traditional closed-off home equity loans up 47% from January through May 2022 compared to the period last year.
Nearly $69 billion in HELOC credit limits and $27 billion in closed home equity loans were issued in the first five months of 2021. That compares to $101 billion in HELOC volume and $38 billion in closed home equity loans during the same period this year, according to a new report from the Municipal Institute‘s Housing Finance Policy Center.
However, securitisations backed by home equity loans or shared equity arrangements are still relatively rare. A recently DBRS morning star The report notes that from 2019 to date, a total of only nine residential mortgage-backed securities (RMBS) offerings, valued at $2.6 billion, have been completed with HELOCs as collateral.
One such offering came out this year. This deal, dubbed GRADE 2022-SEQ2, was a RMBS 198.6 million offering also sponsored by Saluda Grade. It was secured by 2,327 loans containing a mix of closed-end second-tier mortgages and HELOCs, according to a pre-sale report from Kroll Bond rating agency (KBA).
The lender for the RMBS offering was Spring EQ LLC, which focuses on originating second-tier mortgages, including closed-end home equity loans and HELOCs. The first note buyer for the RMBS offering, which was completed in April 2022, was Raymond James & Associatesaccording to KBRA report.
“This year, more prospective issuers have sought to add HELOC securitization funding, particularly given the dramatic rise in home values offering increased home equity availability,” notes the DBR Morningstar report.
Rising demand from institutional capital is also helping to bring additional funding and liquidity to the shared equity market, according to Saluda Grade CEO Ryan Craft. This is expected to lead to an increase in securitization transactions with participation agreements in the future.
“Our mission is to programmatically issue Unlock securitizations, dramatically increasing the available liquidity for American homeowners who need it most,” Ryan said.