The hot real estate market fueling securitization transactions

Based in New York Unlock technologiesfintech operating in the stock market and real estate investment company Grade Saludaclosed a $ 180 million private label securitization (PLS) backed entirely by residential equity agreements (HEAs) originated by Unlock.

The PLS transaction, named UNLOK 2022-1, involves $ 144 million in unrated senior Class A notes, $ 18 million in Class B mezzanine notes and $ 18 million in Class C mezzanine notes.

“The senior debt offering in the securitization was oversubscribed, with participation in mutual funds, credit funds, banks and wealth managers,” the Unlock announcement of the agreement said. “All the investors in the transaction participated for the first time in securitisations fully backed by home-equity agreements [HEAs]. ”

Unlock’s HEA contracts typically have 10-year maturities and carry a 3% origin fee based on Unlock’s original investment, which is not a loan. The general premise is that Unlock provides the homeowner with a cash advance, normally 10% of the home’s present value. In return, the homeowner signs a contract that provides the company with a slice of the homeowner’s future equity. That future share is normally 17%, raised when the home is sold, refinanced, or through a contract redemption, according to the Unlock website.

“Unlock responds directly to consumers’ desire to improve their financial situation by accessing their greatest asset, their equity,” says Jim Riccitelli, CEO of Unlock. “As the HEA asset class gains traditional adoption from traditional funding sources, we will continue to provide creative funding solutions to many thousands of deserving families who cannot qualify for traditional home loan products such as HELOCs. [home-equity lines of credit] and cash-out refinancing loans.

Last year, Unlock and Salude Grade partnered on their initial PLS offering, GRADE 2021-WL1, an unrated $ 153 million securitization backed, in part, by Unlock-originated HEA contracts along with other mortgage assets acquired by the securitization fund.

A combination of rapidly rising property values ​​and the fact that nearly two-thirds of borrowers with at least some equity have mortgage rates below 4% – and would not benefit from refinancing – is helping to push a recovering market to tap into the equity capital. The interest rate for a 30-year fixed-rate mortgage averaged 6.47% on Tuesday, Sept. 21, according to Mortgage News Daily.

black Knight reports in its Mortgage Monitor Report for the second quarter that the amount of touchable real estate nationwide reached $ 11.5 trillion in the second quarter, after accounting for homeowners who retain at least 20% of the net worth. This figure increased by approximately $ 500 billion over the first quarter and $ 2.3 trillion year over year.

San Francisco-based fintech company Unison is another equity holding company that takes advantage of the hot domestic capital market. Earlier this year Unison completed a $ 443 million private label offering backed by its shareholding agreements, called residential equity agreements or REAs.

Unison, launched in 2004, joins another California-based fintech competitor, Point, in pursuing efforts to exploit the secondary market to create more liquidity for the financing of co-ownership agreements. Last fall, Point, based in Palo Alto, partnered with Sequoia Trusta real estate investment fund based in Mill Valley-California – to complete a $ 146 million securitization deal backed by REA-like contracts.

Traditional home equity loans in general are on the rise this year, with the combined volume of home credit lines (HELOCs) and traditional closed home loans up 47% from January to May 2022, compared with at the same time last year.

In the first five months of 2021, nearly $ 69 billion in HELOC credit limits and $ 27 billion in closed-end home equity loans were issued. This compares with $ 101 billion in HELOC volume and $ 38 billion in closed-end home equity loans over the same period this year, according to a new report from the Urban Institute‘s Housing Finance Policy Center.

Securitizations backed by home loans or equity participation agreements, however, are still relatively rare to this day. A recent DBRS Morningstar The report notes that a total of only nine USD 2.6 billion residential mortgage backed securities (RMBS) offerings involving HELOC as collateral have been completed since 2019.

One of these offers hit the market this year. That deal, dubbed GRADE 2022-SEQ2, was a $ 198.6 million RMBS offering also sponsored by Saluda Grade. It was backed by 2,327 loans that included a mix of closed-end and HELOC second-degree mortgages, according to a presale report by Kroll Bond rating agency (KBRA).

The originator of the loan for the RMBS offering was Spring EQ LLC, which focuses on the origin of second-degree mortgages, including closed-end venture capital loans and HELOCs. The initial acquirer of the note for the RMBS offering, which ended in April 2022, was Raymond James & Associatesaccording to the KBRA report.

“More potential issuers have been looking to add HELOC securitization funding this year, especially given the dramatic rise in property values ​​by providing greater holdings of own stock,” notes the DBR Morningstar report.

According to Ryan Craft, CEO of Saluda Grade, the growing demand from institutional capital is also helping to bring additional funding and liquidity to the equity market. This should lead to an increase in securitization transactions involving shareholding contract activities in the future.

“Our mission is to programmatically issue Unlock securitisations, greatly increasing the liquidity available to US homeowners who need it most,” said Ryan.

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