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FirstKey is sponsoring the first all-HELOC securitization in a decade

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FirstKey Mortgage plans to market bonds backed by a portfolio made entirely of home equity line of credit loans — the first all-HELOC securitization in the post-crisis era, according to Fitch Ratings.

FirstKey, the real estate finance business of private equity firm Cerberus Capital Management, will pool outstanding first- and second-lien loans totaling $277.7 million drawn from 1,732 seasoned and performing HELOCs.

All of the loans are adjustable-rate mortgages, and all remain within an interest-only period despite their weighted average seasoned age of more than five years. The loans pooled in the transaction, dubbed Towd Point HE Trust 2019-HE1, may be fully drawn up to $351.1 million.

Fitch utilized the fully drawn figure in assessing the credit standing for the bonds secured by the HELOCS.

The Towd Point transaction includes 11 tranches of notes with varying principal-payment, interest-only and exchangeable features. The senior Class A1 note tranche is sized at $189.1 million with an expected AAA rating from Fitch, supported by 31.9% credit enhancement and a price of 90 basis points over one-month U.S. dollar Libor, the ratings presale report stated.

The transaction is the first all-HELOC collateral pool for a residential mortgage securitization in more than a decade. FirstKey acquired the loans from two originators, one of which, TCF Financial Corp., supplied the full $126.5 million trove of second-lien HELOC loan collateral.

FirstKey is not disclosing the originator of the first-lien loans that total $151.3 million. Fitch, however, notes the first-lien lender is unaffiliated with TCF.

Nearly half the loans (49.8%) are concentrated with California residences.

Fitch says the deal has “materially” stronger credit protections over the deals from the pre-crisis HELOC RMBS market that topped $100 billion in annual issuance in its heyday.

For starters, FirstKey — as the asset manager — will maintain skin in the game with a risk-retention stake through a majority-owned capitalized affiliate. FirstKey will hold a 5% eligible vertical interest all but two subordinate certificate classes.

Also, the weighted average borrower credit score is a 755 FICO, or more than 30 basis points higher than the average 719 FICO for pre-crisis deals. The average HELOC balance in the pool is also three times higher ($160,360) than the pre-crisis average of $52,234, meaning that homeowners are borrowing against “a meaningful amount of equity” they do not want to jeopardize.

“A stronger credit profile and a more supportive structure should provide for a meaningful positive difference in performance,” Fitch’s report noted.

The HELOC market once represented more than $2 trillion on bank balance sheets in the pre-crisis era, according to the Mortgage Bankers Association.

While HELOC balances have declined in recent years (to just $400 billion in 2019, according to Federal Reserve and Equifax data), TransUnion estimates available nationwide home equity at nearly $15 trillion, or $1 trillion higher than the peak in 2006.

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