As US home equity continues to grow, and with the lock-in effect of outstanding low rate mortgages still deterring homeowners from refinancing, providers of home equity lines of credit are looking to capitalize.
Figure, which originates Heloc loans using technology and automation to lower origination costs and has become a familiar face in the US RMBS market as it securitizes these loans, is one of the firms looking to become a bigger presence in the second lien corner of the US mortgage market.
Predictable presence
Todd Stevens, Figure's chief capital officer, told GlobalCapital that he's ending the year feeling good about what 2025 has in store.
“Next year we expect to originate 40% more in Heloc after originating about $5.5bn this year,” Stevens said. “We would like to issue about nine public deals in 2025, following the six we completed this year.
“The market sees us as predictable on the credit side as well as the issuance side — we can be relied on as a steady, consistent, transparent issuer.”
Following Figure’s final Heloc RMBS of 2024, the $318m FGURE 2024-HE6 priced on December 11, Stevens has witnessed a lot of “momentum” building in the market. JP Morgan was structuring lead on Figure's most recent deal, joined by Goldman Sachs and Jefferies as joint leads.
“We’re looking forward to a fast start in the first quarter of 2025,” he said. “We feel very good about our deal execution.
“Our recent new issue (FIGRE 2024-HE6) had a record number of participants in the debt as well as the residual auction.”
The many “tight bids” for the residual class, Stevens said, came from many investors “bidding to win” and aggregate more risk heading into 2025.
According to Finsight, Figure raised over $2.3bn through seven Heloc RMBS deals in 2024 total. The odd one out was the $212m FIGRE 2024-SL1 on October 31, as it was a seasoned Heloc RMBS using loans Figure bought out from previously called deals as a way to recycle capital.
More home equity
Home equity in the US continues to grow.
A Bank of America Global Research report dated December 13 says that home price appreciation (HPA) ran at 3.4% year to date. The bank forecasts 4% of HPA through 2024, and 2% in 2025.
“[The] rate lock-in effect remains pertinent with only 16% of outstanding mortgages having a rate of [over] 6% and [an average mortgage rate] of 4%,” BofA says.
The growth in home equity from rising HPA, combined with a continued lock-in effect, bodes well for Figure on the origination and issuance front.
“We think there are a lot of tailwinds on the horizon for production and performance,” Stevens said. “As we predict solid economic growth keeping interest rates higher for longer, we see rates staying in a corridor that is conducive to solid Heloc issuance.”
Indeed, the broad consensus of higher for longer rates should disproportionately benefit second lien products like Helocs, leaving Stevens feeling “very confident about issuance in 2025”.
The amount of home equity out there also supports Figure’s confidence.
An Intercontinental Exchange (ICE) home equity report from November 2024 estimates homeowners have $11.2tr of “tappable” home equity. “Tappable” equity is defined as the amount of home equity minus a 20% equity “cushion”.
“The average homeowner with a mortgage now has $319,000 of equity in their home, of which $207,000 is tappable,” ICE’s report says.
Room to grow
But, according to Stevens, the second lien market only has about $400bn of outstanding loans, against this roughly $11.2tr total addressable market.
“About 90% of the market is still dominated by banks who originate the product to maintain customer relationships so that they eventually refinance their first lien,” Stevens said. “Among the remaining 10%, we make up about 50% of the market.”
Second liens are challenging to originate profitably, Stevens explained, which poses an obstacle to non-bank originators in the sector. They cost about $3,000-$5,000 to originate — similar to first liens — but the loans are typically smaller, at around $80,000.
Figure, however, has found its groove using technology and automation to scale and lower origination costs.
Backed by strong home equity and an easy process for borrowers, that has bolstered their supply.
“Figure’s customers like the automated process of taking five minutes to apply and getting their money in as few as five business days,” Stevens said.
Investor base growth
The investor community has also grown more involved in the sector, supporting demand for securitizations.
“We have seen tremendous growth in breadth and depth of the investor base in our deals, including the progression from leveraged credit funds to money managers, and now insurance accounts,” Stevens said.
Part of the reason comes down to relative value considerations, according to Stevens.
“Throughout 2024, many more investors have entered our program, in part drawn to the spread pick-up versus non-QM.”
But Figure’s deal performance and data also gives investors more information to make their decisions.
“Because of our rules-based logic and tight credit box, we have a high predictability on knowing what each month’s borrower pool looks like,” Stevens explained. “We have a lot of performance history behind them, granular history on borrower cohort types, and dynamically update our credit box to remove high-risk cohorts.”