Home equity investments (HEI) RMBS look set to continue growing in 2025 as attractive spreads pique investor interest, according to market participants at the Structured Finance Association's SFVegas 2025 conference.
At one at one panel, a majority voted in favor of thinking originations in the sector will exceed $2bn this year.
HEI contracts are an alternative way for homeowners to borrow against their home equity rather than take out a second lien or home equity line of credit (HELOC). The borrowed amount plus a portion of future equity appreciation is repaid when the house is sold or the borrower closes out the contract.
“We are seeing a lot of crossover buyers,” one RMBS banker said. “But I think the tipping point is if more folks that buy corporate bonds start to come into this sector, the risk premium is pretty attractive [against similar rated bonds in other sectors].”
The issue so far is that issuance has been limited, at best, compared to more developed sectors in RMBS, such as non-QM, said bankers at an HEI-focused panel in Las Vegas on Sunday afternoon.
Issuance for HEI was $936m across five deals in 2024, according to Finsight. Non-QM issuance, by contrast, was $43bn in 2024.
“I don’t want to say ‘insatiable demand’, but we get a lot of calls from people who want to buy these contracts,” the earlier banker said.
But in the spirit of Vegas, participants on a panel for HEI favored “over” when asked whether HEI originations in 2025 would be over of under $2bn.
Uncertain rules
Yet although optimism is growing as this asset class continues to mature, it still faces regulatory uncertainty.
HEI contracts don’t fit the box of standard mortgage products like loans and have gotten regulators’ attention at both the state and federal levels.
This has stoked the ire of some, who viewed the regulators as standing in the way of the HEI market.
“I don’t know why but regulators seem to be of the mindset that they are smarter than the market participants,” one investor told GlobalCapital. “Mortgage regulators should not be regulating HEIs as a mortgage product, because it’s fundamentally not one.”
Today's regulation is a patchwork at the state level, with the lawyer on the panel calling it a “smorgasbord”. But he encouraged the market to keep working with the regulators and set regulation that helps advance the whole market.
“Other states should look to Washington state, which has introduced legislation in January of this year to regulate HEI,” the lawyer said.
Another investor agreed, telling GlobalCapital that states like Washington had “already made their peace” that HEIs should not be regulated like a mortgage product.