New legislation could boost the market for bonds backed by home equity lines of credit, according to market professionals. The American Jobs Creation Act, which became effective at the start of the year, allows these loans to now be included in real estate mortgage investment conduits. Previously, the draw-down option in these lines of credit prevented these loans from being included in the conduits.
As a result of the change, market participants are expecting this year to see the first senior-subordinated deals backed by home equity lines of credit. Although it is a roughly $35 billion annual market, previous transactions have been sold with monoline guarantees. "It opens up more possibilities for a different investor base," said Marjan Riggi, v.p./senior credit officer at Moody's Investors Service. She noted only triple-A HELOC paper has been available, but the legislation paves the way for mezzanine and subordinate investors to get a piece of the action. "We've been receiving a lot of inquiries and you should see a few deals in the coming months," she added, declining to be more specific.
Senior/sub transactions would make for an interesting addition to the mortgage-related asset-backed scene, according to market participants, since borrowers are prime but the loan is generally a second-lien on a home. Low rates have allowed borrowers to amass equity in recent years and increase the pool of available collateral. That being said, rising rates should offset any increase in issuance and Riggi expects this year's volume to slip to $30 billion.