Securitization in Focus — July 2024
Asset-backed Securities
ABS Issuance ($B)
Issuance in the ABS market has shown no signs of slowing in 2024, with over $206 billion year-to-date.
Conn’s Liquidation & Market Impact
Conn’s, a southern home goods retailer with locations in more than 10 states, announced the closure of all its stores after an initial round of closures in July. The Chapter 11 filing was expected, but the closure of all its stores was not.
What does this mean to ABS tied to consumer loans from Conn’s? As usual in these situations, the transfer of servicing will create a short-term disruption, but the bigger impact is on the 20% of borrowers who make their loan payments in-store. This could lead to strategic defaults as borrowers stop making scheduled loan payments because the stores are closed.
Commercial Mortgage-backed Securities
CMBS private label issuance continues to surge, surpassing $55 billion and the full-year 2023 issuance ($46 billion).
CMBS Issuance ($B)
Delinquency Rates (%)
The Trepp CMBS delinquency rate continued to climb in July, up 0.08% to 5.43%. The guilty party? It's no surprise that continued challenges in the office sector plague the market. Offices accounted for nearly 2/3 of newly delinquent loans in July. The office delinquency rate, at 8.08%, is the highest since November 2013 (8.58%).
Residential Mortgage-backed Securities
Issuance
Non-Agency RMBS YTD issuance reaches $68.8 billion, an increase of 82% year-over-year.
3.5% mortgage rate
Entire home
3.5% mortgage rate
+
9% HELOC
15% of home equity
Return of the HELOC
A HELOC, or home equity line of credit, is a revolving line of credit secured by equity built up in a home that offers credit at a lower rate than credit cards or consumer unsecured loans. HELOCs are included in the “Other” category of issuance, a portion of the non-agency RMBS that has issued $13.8 billion YTD, compared to $4.5 billion (2023) and $12.5 billion (2022) over the same period.
Household real estate wealth has reached $33 trillion, with mortgage rates still north of 7%. Via a HELOC, owners can pull equity without refinancing the entire mortgage and resetting to a higher overall rate. Example: Instead of refinancing the mortgage from 3.5% to 7.0% to pull equity from the home, the homeowner uses a HELOC at 9% to draw a certain amount. The blended rate of 3.5% mortgage combined with the 9% HELOC results in a much more attractive blended rate than refinancing the entire loan at 7.0%.
Consumer Unsecured Loans
Since the global financial crisis, marketplace lending and brick-and-mortar lending have emerged as alternative forms of financing to unsecured loans from traditional financial institutions.
Marketplace Lending
It started as peer-to-peer lending, a process that brought together those looking to borrow and invest. As the peer-to-peer industry grew, it evolved from simple loans between borrowers and investors. Institutional investors (hedge funds, insurance companies, etc.) began to fund loans for various entities that had emerged from the ashes of the global financial crisis to originate consumer and small business loans. These firms were filling a void created by the departure of large financial firms focused on shoring up balance sheets. Previously, marketplace lenders brought together individual borrowers and investors and served as the facilitators (for a fee). Post-crisis, new entrants in the market function more as traditional lenders and utilize funds raised through forward purchasing agreements with institutional investors.
Brick-and-Mortar Lending
Brick-and-mortar lending serves consumers by providing physical locations to apply for and make payments on loans. This service appeals to customers who value face-to-face interaction when conducting business and are looking for guidance through complex financial transactions.
What do consumers use the loans for?
Household expenses
Debt consolidation
Moving
Medical expenses
Life event
Home improvement
Business
Large purchase
Other needs
Sources: Deutsche Bank, Trepp.
Investment Grade is a bond quality rating of AAA, AA, A or BBB.
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The views expressed are those of Diamond Hill as of August 2024 and are subject to change without notice. These opinions are not intended to be a forecast of future events, a guarantee of future results or investment advice. Investing involves risk, including the possible loss of principal. Past performance is not a guarantee of future results.