The surge in residential real estate has left many people with far more assets compared with banks. Often the properties are well paid down from original low-interest mortgage balances. Some entities like TPG Angelo Gordon hunger for the possibilities.
“Traditionally you would refinance your first [mortgage] and take some cash out,” said TJ Durkin, head of structured credit and financing at TPG Angelo Gordon, in an interview on Bloomberg’s Credit Edge podcast. But he said the “math doesn't make any sense today” because of the difference between the original mortgage rates millions of homeowners have been under and the current relatively inflated rates.
Since early 2011, consumer residential mortgage rates were generally under 5% and as low as 2.66% in January 2021. After the Federal Reserve started increasing the benchmark federal funds rate in the second quarter of 2022, the 10-year Treasury yield also started climbing in anticipation of higher interest rates and the possibility of sustained inflation. With the 10-year yield, the average 30-year fixed-rate mortgage grew to as high as 7.79%, and that most recently hovered around 6.8%.
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Regional banks had dominated the equity-based lending space for years and private equity had a hard time breaking its way in, according to Durkin. But the old approach of refinancing at a decent rate and taking out some cash doesn’t work and regional banks “can’t fulfill that anymore.” He added that over the last 12 months, his firm has been interviewing counterparties, whether banks or other originators, to understand the market and how to fit in.
“And so, we're seeing the evolution of home equity products,” Durkin said. “Again, we think the credit is pristine at this point. So that's a space where we're looking to get deployed quickly. We know credit standards can loosen over time as more people, you know, look for that opportunity. … We expect there could be $150 to $200 million of origination per year with a — call it $2 trillion dollar — really an addressable market there.”
“That's a space that we think is in the very early innings of transitioning into more of a stable private credit subsector,” he added.
“I’ve heard banks and credit unions are saying it’s an opportunity,” Nathan Stovall, director of financial institutions research at S&P Global Market Intelligence, told GlobeSt.com. “They see it as an opportunity to grow their portfolios, to grow loans.”
Those who remember the many forms of financing that helped crack the residential real estate market in the Great Recession might be concerned about whether this could be a long wind-up for another cataclysmic crash. Stovall said that conditions are far different from the start as credit is nowhere near where it was then.
“You’re not seeing vast securitization machines to get the lending off lenders’ books,” Stovall said. “You also had tons of new supply coming on the market, keeping the market going.” That is no longer the case. And underwriting is much stronger now.
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