HELOC Boom on Horizon

Issuance of home equity lines of credit in the U.S. residential mortgage-backed securities sector is expected to soar as a result of the American Jobs Creation Act of 2004, which went into effect at the start of this year, the rising rate environment and an appreciating housing market, Fitch Ratings said in its latest edition of Mortgage Principles and Interest.

“HELOCs were not able to be securitized using a REMIC structure as each additional draw was considered a new loan prior to the passing” of the Jobs Act, which “addresses the revolving nature of a HELOC that allows borrowers to draw on their lines, after the loan has been securitized,” said Fitch director Andrea Murad in an announcement.

Despite these limitations they still were considered real estate mortgages for the purpose of the taxable mortgage pool rules. Under such rules, time-tranching debt that financed HELOCs in a structure other than a REMIC would likely make the trust subject to corporate income tax. Credit enhancements in the form of excess spread, overcollateralization, and bond insurance covered principal losses and missed interest payments.

Due to negative tax implications in years prior to the act, HELOCs were held primarily in portfolio or securitized in owner trust structures that issued only one class of notes.

With lenders searching for new opportunities to make HELOCs attractive amidst rising rates and with many borrowers tapping into their growing equity without refinancing their first lien commitments in the appreciating house price environment, “the result has been an increase in HELOC originations, with securitization volume also rising to $36.4 billion in 2004 from $6.0 billion in 2003,” Fitch reported.

And, HELOCs have been “one of the most innovative RMBS asset classes in 2005 thus far,” the report said. The changes in legislation allowing for senior-subordinate real estate mortgage investment structures and increased origination volume “make this a new growth asset class for industry participants.”

Fitch announced it has already rated two senior-subordinate HELOC transactions this year from Lehman ABS and Greenpoint Mortgage Funding, with more anticipated throughout 2005.