Private lenders are looking for ways to expand their reach into other parts of the economy, as the traditional direct lending market has become crowded. One path is asset-based finance, which can encompass everything from auto loans and credit card debt to mortgages.

The residential market is ripe for the taking, as alternative asset managers can finance home loans that can't be tied to Fannie Mae or Freddie Mac, Ellington Management Group said in a report sent to investors.

Homeowners are increasingly tapping products like home equity lines of credit, through which they borrow against the value of their property, thanks to a surge in property values. These credit lines and other home equity loans also allow borrowers to get additional credit without refinancing their existing low-rate mortgages.

While banks have traditionally provided these loans, the regional banking crisis in 2023 has given private credit firms an opening. These funds can finance these loans and then repackage them into bonds of varying risk and sell them to investors such as insurers. There's investor interest in residential mortgage bonds, with sales up more than 30% so far this year, according to data compiled by Bloomberg.

"As production of these loans has begun to increase, we have already seen a rapid shift away from banks to non-bank originators," Ellington said of home equity lines in its report, which was seen by Bloomberg News. However "non-bank originators do not operate with large amounts of capital," which can provide an opening for private funding, the firm added.

TPG Angelo Gordon has estimated home equity loans and lines of credit could be a $2 trillion market. The outstanding volume of such products rose by $9 billion to hit $400 billion in the fourth quarter of 2024, according to data from the Federal Reserve Bank of New York, marking the eleventh consecutive quarterly increase.

Private credit firms have also looked beyond home equity lines to take up market share broadly. Brookfield Asset Management Ltd., for example, has agreed to buy a majority stake in Angel Oak Companies, a mortgage lender and investor that manages over $18 billion. Angel Oak's mortgage-origination business focuses on home loans for borrowers who don't typically qualify for traditional mortgages from banks or government agencies.

Sixth Street Partners also formed a joined venture with Figure Technology Solutions earlier this year to provide capital for the lender's mortgage business.

A robust housing market, the retrenchment of banks and the boom in residential mortgage bonds altogether presents an opening for asset managers "to generate double-digit returns in the sector, all while providing allocators with clear diversification benefits to their existing portfolios," according to Ellington.

"There's an attractive opportunity for originators and investors to allow consumers to take money, to consolidate debt, to take money to do home improvement projects," Aaron Fink, Centerbridge's head of asset-based finance, said earlier this year. "They're increasingly locked into their homes."