So far, 2022 has been a rocky year for private label securitization. The rapid rise in interest rates has left originators holding less-salable, lower-coupon loans and delayed or cancelled a number of securitizations. Then, in early July, two non-QM shops closed, and one major warehouse lender announced it was tightening its standards for non-QM. As we reached the halfway point in the year, the volume of new deals is down sharply and market sentiment is decidedly less positive.
When we look at our deal flow, we are seeing higher coupon non-agency and non-QM deals slowly coming to market as well as bulk MSR transactions. We’re also seeing securitizers looking at other products. High on everyone’s list: home equity. With U.S. homeowners sitting on $11 trillion of tappable equity, it is a tempting target and an attractive replacement for cash-out refinances. In the past, however, efforts to securitize home equity products have failed to gain traction (more about this in a future blog).
There are some encouraging, early signs that this may be changing. Recently, both loanDepot and Guaranteed Rate announced new home equity offerings, and other large non-banks and fintech platform originators are reportedly working on similar product offerings. This is evidenced by our recent signing of a 1,000-loan-a-month HELOC review. In fact, Clayton has underwritten more than $1 billion dollars of home equity collateral.
Although only a few home equity deals have already come to market, others will be coming. It won’t entirely fill the gap left by the reduction in non-QM, but it could be enough to keep some engines fed until that market returns. The question is, how many and how consistently? Before they truly commit to this product, securitizers will want to see a steady supply of HELOC collateral because of the work required to initially calibrate the process.
So, what’s next?
It remains to be seen whether the current disruption in the non-QM market is a blip or if it is a sign that private capital is reassessing this asset class. In either case, the current slowdown will be a challenge to the TPR market. This will be particularly true for smaller players and new entrants that saw last year’s capacity constraints as an opportunity. As volumes decline, these small and poorly capitalized players will struggle to maintain staff and service levels. We’re already getting calls and resumes from underwriters looking to work for a market leader with a proven track record of managing cycles successfully.
Clayton remains both financially strong and operationally sound, with the industry’s best underwriting and deal management talent to consistently hit your settlement dates.
If your strategy involves looking at alternative asset classes, give us a call. We’ll put our experience and advice to work for you.