The process of origination and securitization of Home Equity Loans (HELs) is currently undergoing a structural shift that may have implications for liquidity going forward. The top originators (which include RFC and Countrywide) have increased their market share and overall production volume of loans, strengthening their commitment to the product. Furthermore, investment banking firms have recently begun establishing new securitization shelves, which enable them to purchase and package HEL whole loans from smaller originators. Lehman, which operates the SASCO shelf, has engaged in this type of trading and securitization activity for a number of years.
There has been no shortage of news stories on the problematic path that the overall market for these loans has taken in recent months. Several prominent originators of HELs from the past few years (e.g., The Money Store, UCFC) have either shut down, been sold, or have scaled back production significantly. Other, smaller originators have been unable to compete in a difficult marketplace. Aggressive gain-on-sale accounting practices, poor pricing, and a general dependence on securitization for capital access by smaller originators have been the most obvious culprits. Additionally, recent scrutiny of originators' alleged use of predatory lending practices has weighed heavily on the market. However, in the wake of these negative trends, the stronger players have flourished.