What do First Union Corp., Chase Manhattan Corp., and Signet Bank all have in common?
They are among the handful of lenders that are pioneering in the securitization of home equity loans.
And they are blazing a trail that could lead many lenders toward a secondary market as viable as the one for conventional loans.
The three, along with a few other financial institutions, were cited as pacesetters at a conference on home equity securitizations held last week in the heart of New York's financial district.
Banks "touched upon" the market in 1995, said Robert M. DiOrio, director of asset-backed finance at Merrill Lynch & Co.
"You'll see increased issuance from them going forward," Mr. DiOrio said.
By taking matters into their own hands, banks are bucking the customary practice of holding the loans on their books or selling them to outside companies that handle the securitizations.
Banks earn greater fee income and have more control over the transaction when they handle matters in-house, executives at First Union said in an interview earlier this year, just after completing their first sale.
Mr. DiOrio and others at the conference predicted that home equity loans would soon become more like first mortgages, which are readily securitized and sold into the secondary market.
The mortgage market has been able to take off because of support from Fannie Mae and Freddie Mac. These government sponsored agencies act as middle-men, purchasing banks' loans and issuing mortgage securities on Wall Street.
Without that support, many home equity lenders have stayed on the sidelines. There is an estimated $430 billion of home equity loans outstanding. Of that pool, just $12 billion of home equity loans have been securitized by banks.
It's to banks' advantage to dive in, said Len Blum, managing director at Prudential Securities.
By doing so, banks "get the lowest cost source of funds and cash as quickly as possible," Mr. Blum said.
But, "securitization isn't for everyone," Mr. Blum added. Smaller banks and finance companies may find it too expensive to develop an infrastructure for the program, he said.
Deal makers on Wall Street are positioning the loans as substitutes to riskier mortgage investments. "They're a very good alternative" to collateralized mortgage obligations, said Charles Q. Huang, senior vice president at Prudential Securities.
Pension funds, insurance companies, and European investors are all likely investors, investment bankers said.
"It's a broad market and all kinds of people are buying the paper," Mr. Blum said.
Still, not everyone is sold. Home equity securities are unappealing because they lump together a spectrum of investment types - from A quality loans to more risky B and C investments, one pension fund manager said.
"Home equity is a big general sector," said Paul A. Ullman, co-manager of the mortgage securities portfolio of Alliance Capital Management Corp."It's difficult given that range to get a handle on prepayments. That's why we've stayed away."
Mr. Blum acknowledged the problem. "We have to get at the issue of investor confusion," he said.