A new securitization vehicle could make it easier for banks to build up their home equity lending. The door-opener is called a Fasit, or financial asset securitization investment trust.
The structure offers tax relief to issuers and originators of various consumer and commercial loans in much the same way as the real estate mortgage investment conduit, or Remic, removed tax obstacles for first-lien residential mortgage lenders in the 1980s.
Lenders can begin selling Fasits, in the form of bundled pools of loans, to Wall Street investors on Sept. 1. That's the date Congress authorized when sanctioning Fasits in the 1996 tax law.
As with Remics, Fasits enable lenders to create entities that do not have to pay corporate level taxes. And the investor can treat the income as debt interest for Federal tax purposes.
What's more, Fasits will be a bit more flexible than Remics in that the rules allow loans to be added to existing security pools, according to speakers at a conference last week in Boston.
The structure also allows the additions of new assets and loan modifications at any time, said Ronald S. Borod, structured finance chief at the Boston law firm of Brown, Rudnick, Freed & Gesmer.
The tax benefit of Remics helped create a $1.6 trillion securities market that allows banks to easily package and sell mortgages and do more lending with the proceeds.
With Fasits, "a lot more money could go into the home equity industry" because more lenders would be able to pool and sell loans to Wall Street, said Robert P. Shedd, president of First Mortgage Trust.
Mr. Shedd said he will be looking at how his company, a residential lender in West Roxbury, Mass., can use Fasits to increase loan flow.
Fasits will most benefit "smaller originators of home equity loans-banks and thrifts-that have been reluctant to get involved" with home equity securitizations in the past, said Paul B. Jenison, managing director of asset trading and finance at PaineWebber Inc.
Indeed, until now only large finance companies, like Money Store, have had the capital, systems, and volume to securitize their home equity and subprime loans.
Now, smaller lenders "will have a way to more efficiently use off- balance-sheet securities," Mr. Jenison said.
That development could make bank-owned home equity lenders more competitive with finance companies, he said.
At the same time, home equity loan rates, which now top 14%, could decline as the market becomes more liquid, industry observers said.
"By broadening certain originators' access to the capital markets, Fasits could lower borrowing costs to consumers while allowing lending institutions to diversify their risk," said Christina A. Cotton, senior analyst with Moody's Investors Service.