After riding on an even keel, home equity lines of credit (HELOC) deals will be back with a vengeance, a recent Standard and Poors report said, with a predicted 20% to 25% increase from last year's volume.
The projected dramatic rise in issuance will largely be caused by the return of two of the major issuers in the sector: Mellon Bank and Fleet National Bank.
Mellon and Fleet (see ASR 1/22/01) have held these books for some time now - pools that consist of older and newer production, thus resulting in bigger transactions. Since the beginning of the year, Mellon has closed a $669 million deal and Fleet is expected to close a $875 million transaction in mid-April.
The anticipated volume increase goes against a trend that has developed over the last two years. According to S&P, the sector saw almost the same amount of issuance in 2000 and 1999 with $4.934 billion and $4.967 billion in securitization volume, respectively.
Last year's top three HELOC issuers were Countrywide Home Loans Inc., GMAC Mortgage Corp., and GreenPoint Bank.
The past year also saw Residential Funding Corp., which ranked second in 1999, slide down to the number seven slot after coming to market with only one transaction, worth $400 million. Residential Funding is currently concentrating on whole loan executions and has given no indication of any near- term securitization activity.
On the origination end, the rating agency expects HELOC issuers to continue to streamline and develop their prime closed-end second-lien (CES) and origination processes.
"Although prime HELOCs and CES products are predominately originated through the retail distribution channels, the Internet and indirect channels are growing," said Karen Kostiw, a director at S&P.
Additionally, HELOC issuers are expanding their usage of automated appraisal systems or automated valuation methods, or "AVMs", to validate the properties backing the mortgages. These systems are taking the place of drive-by appraisals. S&P said that some issuers expect to use AVMs on up to 50% of their portfolio this year.
S&P also expects more innovative credit enhancement features to be used in HELOC deals going forward, taking cue from recent transactions.
Greenpoint's last deal, for instance, had a somewhat unique credit enhancement structure. The transaction, bond-insured by Financial Guaranty Insurance Co., was initially undercollateralized by 2%. When the collateral and bonds reached parity, 70% of the excess spread went to cover losses and bring the overcollateralization (OC) to its target and the other 30% was released as a WAC IO. The transaction had 24 months to reach its required OC target level. To protect against the initial undercollateralization, Greenpoint Bank issued a demand note for the amount undercollateralized. If the targeted OC was not met within a 24-month period, the demand note would be tapped to bring the OC to its required target.
"I think issuers and underwriters are going to be more creative as far as structuring the HELOC and CES product," said Kostiw. "Perhaps HELOC and CES transactions will be structured using double-A and single-A pool insurance providers as seen on Countrywide's closed-end second 2000-5 transaction."