Editor: David Reiss
Brooklyn Law School

October 14, 2013

A HELOC of a Securitization

By David Reiss

S&P posted A Look At U.S. Second-Lien And HELOC Transactions Post-Crisis.  In 2008, they announced that “would halt rating new U.S. RMBS closed-end second-lien transactions because loan performance had deteriorated significantly.  [They] haven’t rated any U.S. RMBS second-lien (both second-lien HCLTV [high-combined loan-to-value] and closed-end second-lien) or HELOC [home equity line of credit] transactions since 2007.” (1) They also note that notwithstanding the fact that such securitizations had ended, “HELOC loans continue to be originated, with banks generally keeping these types of loans on their books.” (1)

The report provides a some interesting data on those securitizations.  Let me share one highlight, a table of lifetime loss projections of RMBS with different collateral types. For the 2007/2008 vintage, they performed as follows.

Second-lien  HCLTV:  45%

Closed-end second lien:  58%

HELOC:  42%

Subprime:  49%

Alt-A:  29.25%

Negative Amortization:  43.25%

Prime:  10%

With a bit of understatement, they conclude that “[c]losed-end second-lien transactions may be limited going forward because of limited investor and issuer appetite, given past performance and uneven home price appreciation.” (5) They note that HELOCs are not included in the definition of Qualified Mortgages or Qualified Residential Mortgages [QRM] “so the issuer would most likely have to retain a stake in the deal, increasing issuance costs.” (6)

This seems like a good a good result, if you ask me. Here is a product that performed miserably (with losses of greater than 40%!!!) as a securitization. If the new QRM rules reduce these securitization but banks continue to originate them for their own portfolio, perhaps Dodd-Frank is doing its job in the mortgage markets. Of course, we want to ensure that there is sufficient sustainable credit for HELOCs, but it is good to see that portfolio lenders are stepping in where they see a market that RMBS issuers has exited.

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