A "perfect storm" is paving the way for growth in home equity investment contracts, with originations and secondary market activity both on the upswing for the emerging asset class, industry leaders said this week.
Tailwinds behind the product gives reason for optimism, according to Mark Ginsberg, an expert in securitized products originations at Barclays Investment Bank.
"Rates remain elevated. Equity in homes keeps growing. Homeowners need a way to access that. There's some channels available to everybody. There's way more demand moving around from homeowners than institutional capital is ready to meet. That's just a great perfect storm," he said at a Morningstar DBRS home equity investment panel in New York on Wednesday.
Interest does not accrue as they would in a home equity loan, making the products attractive to some property owners and others who may not qualify for traditional lending. Instead, payment of an agreed-upon equity share, factoring in accrued value, becomes due at the end of the contract term or when the owner vacates.
While the agreements have seen their
"A lot of the originators expect to do more than a billion this year," he said.
Within secondary markets, interest is also increasing as more investors become aware of the product, with currently more demand for it than supply. Investors in securitized HEI products has regularly consisted of a close-to-equal share among hedge funds, insurance carriers and money managers.
"Volume is going up, and the pipeline is very robust," said Morningstar senior vice president Derek Moran, who oversees ratings for U.S. mortgage-backed securities.The agency has rated six deals so far this year, outpacing 2024's level over the same period.
A primary difference between current activity and previous interest levels is the number of participants in deals, "really sort of exploded," Ginsberg said in reference to how investor sentiment has shifted.
"There was a time when it took a lot of effort to basically get a deal done," the Barclays executive remarked.
What are current secondary market challenges?
With HEI products still relatively new to the market, the issuer base is still attempting to become fully knowledgeable about them, the panel noted.
"There's unique tax consequences associated with it. There's a lot of different pieces that you need to get comfortable with to underwrite," said Tim Carr, chief investment officer at Saluda Grade.
Along with trying to understand regulations and perform necessary due diligence, the contracts themselves require more scrutiny than what many might be accustomed to.
"Every contract is slightly different. Everyone's originating something slightly different. It's not like a mortgage. You know exactly what a mortgage is," Carr continued.
"Every one has different nuances. You have to pick your horse, or you have to look at all the horses and underwrite each one and figure out which one you want to buy. I think that's been some of the hurdles."
An investment product that is still too new to offer a long look back at performance history also makes gauging risk difficult.
"I think it's a hybrid between reverse mortgages and second liens," said Craig Sedaka, portfolio manager at Libremax, in explaining the closest comparable products.
"On the bond side, you are in a market that's developing," Sedaka added but noted that investors could be compensated well by taking on risk.
