New financial products are emerging to meet demand
Wall Street is ramping up bond issuances backed by home equity loans as rising mortgage rates push US homeowners to stay in place and borrow against their existing properties.
Roughly $18 billion in bonds tied to home equity loans were issued in 2024, according to Deutsche Bank AG and Bloomberg data. That figure is nearly triple the amount in 2023. Analysts say 2025 is on track for similar levels.
After mortgage rates began climbing in 2022, many homeowners who locked in rates near 2.75% are hesitant to exchange them for new loans closer to 7%. The result is a shift in borrowing behavior. Homeowners are choosing home equity lines of credit or second mortgages to fund renovations and other expenses.
“There’s a near record $35 trillion of that equity to tap into,” Bloomberg reported.
“They’re taking their mortgage-making factories and starting to use them to create home equity products,” said Gabe Rivera, co-head of securitized products at PGIM.
A shift in borrower behavior
Financial firms have responded. Angel Oak Capital Advisors and Annaly Capital Management Inc. issued their first bonds backed by home equity lines of credit in 2024. In April, Mr. Cooper Group Inc. followed with a bond backed by second mortgages.
These securities remain a small segment compared to traditional mortgage-backed securities from Fannie Mae, Freddie Mac, and Ginnie Mae, which Citigroup Inc. estimates will total $1.15 trillion this year. Still, the market is expanding. TPG Angelo Gordon estimates a $2 trillion opportunity in home equity lending.
The rise of home equity investments
Home equity investment (HEI) contracts are also on the rise, offering upfront cash in exchange for a portion of future home value. These are often used by borrowers with lower credit scores.
“Investors considering bonds backed by these contracts should carefully scrutinize them,” Michael Hislop, an analyst at Curasset Capital Management, told Bloomberg. “What kinds of borrowers are going to find HEI the most attractive? Ones without money to make mortgage payments.”
According to DBRS, defaults on HEI contracts remain relatively rare.
Though the volume of home equity debt is far lower than before the 2008 housing crisis, experts remain cautious. “It’s true that there are trillions of dollars in home equity,” said Ryan Singer, head of residential credit at Balbec Capital. “But if you look at the individual mortgages, you can actually see that borrowers are making very small down payments on average.”
With interest rates still elevated, industry observers expect the home equity lending trend to continue.
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