Last year will be remembered as the year of home equity ABS, with this asset category overtaking the credit card sector's long-held top spot in terms of issuance. The growth in home equity ABS can be attributed to the trend among consumers to consolidate their outstanding loan balances, the entrance of new issuers into the market and the favorable interest rate environment. As outstanding consumer debt has grown, the ability to consolidate liabilities into a single loan has become more attractive. In addition, the tax benefit of being able to deduct interest payments on home equity loans has also lured consumers into consolidating their other outstanding debt into home equity loans. The entrance of new issuers into the marketplace has also served to fuel the growth in issuance.
Banks typically are active in originating loans to A borrowers.
As a result, the remaining pool of borrowers with less than stellar credit histories was an untapped market. Aggressive finance companies recognized this unserved niche and filled the gap by extending loans to these impaired credits. Securitization of these loans has enabled finance companies to gain access to more capital and thus make additional loans. However, finance companies are experiencing the ramifications of additional risks inherent in these loans. Several sub-prime home equity lenders have suffered financial problems in the wake of aggressive lending practices and prepayment assumptions.