Home equity securities are proving popular on Wall Street, where investors ranging from banks to mutual funds think they provide a good yield with relatively little risk, a survey showed.
The study by Capital Access International found that portfolios of all sizes have been assembled, with roughly half of those who invest in the securities saying their holdings exceed $1 billion.
The survey of 450 investors documented a growing market that is helping to fuel a boom in home equity loans by enabling lenders to replenish capital for new lending.
"There's now a big demand for asset-backed securities," said Jeanette Rogers, research chief at Capital Access, Murray Hill, N.J.
The category encompasses a variety of loans, including auto, credit card, home equity, and manufactured housing.
Home equity loans are a lot like mortgages, with houses serving as collateral for repayment.
But in many cases home equity loans carry less risk of prepayment than mainstream mortgages, analysts said.
That's because home equity loans are usually smaller than mortgage loans, putting borrowers under less pressure to refinance as rates decline, said Dale Westhoff, senior managing director at Bear, Stearns & Co.
Mr. Westhoff, speaking at a recent mortgage securities conference sponsored by Information Management Network, also said home equity borrowers with impaired credit have less ability to prepay than many mainstream mortgage holders.
Home equity loans are indeed a class that is coming into its own. In the first half of this year, issuance of securities backed by home equity loans topped, for the first time, new credit card securitization volume.
Two-thirds of those surveyed by Capital Access indicated they regularly make home equity securities part of their investment portfolios.
Pension funds are the biggest buyers, with 83% holding the products, the survey found. From 65% to 69% of investment managers at surveyed banks, insurance companies, and mutual funds buy home equity securities.
Capital Access reported that 94% of investors choose assets backed by fixed-rate loans, while 56% buy floating-rate securities.
Investors in asset-backed paper also prefer short- and intermediate-term maturities over money market and longer-term maturities, Capital Access said.
Green Tree Financial Corp., Saint Paul, filed a registration to sell up to $1 billion of certificates backed by home improvement and home equity loans.
The financial services firm, which is a major securitizer of subprime loans, may decide terms of the certificates later and sell them as it needs financing under the shelf registration.
Green Tree will use the sale proceeds for general purposes, including making or buying more home loans, paying the expenses of pooling the home loans, and issuing certificates.
