Historically low mortgage rates piled with high housing prices have offered a new avenue for Asset Backed securities.
KBRA releases research analyzing new issue activity, loan characteristics, borrower attributes, and performance trends for the home improvement ABS segment of the unsecured consumer loan market.
Many homeowners in today’s market are experiencing what has been dubbed “hate my house, love my mortgage” syndrome, driven by rising housing prices and historically low mortgage interest rates more than doubling over the past 24 months. As a result, many homeowners are staying in place, but making improvements to their home to better suit their current needs.
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However, the rapid rise in mortgage rates has made certain refinancing options, including cash-out refinancing, economically unattractive for many. Some homeowners are now accessing closed-end second lien mortgage loans (CES) and home equity lines of credit (HELOCs) as a more attractive source of home equity release. In addition, home improvement loans have grown in popularity in recent years, given the point-of-sale product offering, promotional interest rates, the absence of a requirement for a second lien on the borrower’s home, and faster credit decisions based on the borrower’s willingness and ability to repay. In addition to being an alternative to CES and HELOCs, home improvement loans provide borrowers with an alternative to other forms of consumer credit such as credit cards and unsecured consumer loans.
In 2024, we expect home improvement loan originations to increase and for ABS new issuance volumes backed by home improvement loans to remain in line with 2022-23 levels, as lenders continue to utilize diverse funding sources including whole loan sale programs, balance sheet, warehouse facilities and a combination of private and public securitizations. Given the prime quality of the underlying borrowers and utility to a borrower’s home, we also expect home improvement credit performance to remain in line with solar loan performance and to likely outperform most other consumer loan products.
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