Morningstar DBRS' Takeaways From Its HEI Panel in New York City: Market Acceptance Growing Steadily and Opportunities Abound
RMBSAs part of its takeaways series, Morningstar DBRS is publishing this write-up about pertinent topics discussed at the home equity investment (HEI) panel held at the Katten Muchin Rosenman LLP (Katten) offices in Midtown Manhattan on June 11, 2025.
Morningstar DBRS and Katten co-hosted an event featuring a panel of HEI subsector leaders discussing market dynamics and the outlook for securitizations this year and beyond. With more than 150 people in attendance, it was a full house with every seat taken at Katten's office in Midtown Manhattan.
Derek Moran, Senior Vice President and Sector Lead, U.S. RMBS Ratings, represented Morningstar DBRS on the panel and took the first question of the afternoon concerning credit ratings for HEI products. Moran summed up credit rating activities around HEI issuances since Morningstar DBRS was the first credit rating agency with a methodology in the space. "We issued about a dozen ratings last year and are on pace to meet or exceed that number this year," Moran said. He noted, though, that a significant portion of the credit ratings in the pipeline are private.
Market acceptance of HEI products was a major topic for the panel. Panelists agreed that education around HEI is ongoing and that investors remain hesitant about these securitizations in large part because there is a lack of performance history for these deals, which will take several years to realize. When asked to analogize HEI products to housing finance products the market may be more familiar with, panelists mentioned reverse mortgages, second liens, and equity lines of credit.
The panel highlighted uncertainty around cash flow timing and possible extensions as a big consideration for investors. Moran acknowledged that contract buyers and bond buyers face different types of exposure and risk when it comes to extensions for HEI products.
Two other important considerations the panel focused on were extensive variation in deals and regulatory risk. Panelists said they were looking for action from state attorneys general in the HEI space after the Consumer Financial Protection Bureau started monitoring HEI products at the end of the Biden administration. There was a consensus among panelists that the industry should work in close collaboration with regulators to improve consumer disclosure, promote legal clarity, and create more uniform structure in the subsector.
Moran advocated for the development of similar structure across HEI deals, saying that this would be beneficial to market participants and might help broaden the pool of investors interested in these products. He said that the current "sweet spot" of these deals is five years, while noting that, hypothetically, if deals extend to 30 years and home prices stay flat, there may be a point at which annualized returns start to dip . On the contrary, he also said that if home prices grow, that growth will help bolster returns for the longer periods too. When asked by the audience which products Morningstar DBRS is most comfortable rating, Moran remarked that while some products are more compelling for the upside and others the downside, all are subject to the same stress framework.
Notwithstanding the risks, panelists mentioned that market acceptance and the number of buyers for HEI products is increasing. While HEI products are still relatively cheap for investors, spreads are tightening as more buyers enter the market. Panelists agreed that these dynamics would help HEI products grow over time.
On the consumer side, one panelist noted that institutional capital is not currently meeting homeowner demand, which is likely to drive further growth of HEI products in the foreseeable future. Attendees were split on home price appreciation (HPA) expectations; a live poll projected on screen showed that 41% of respondents indicated that HPA would be flat this year, while 38% thought it would increase. As for his HPA expectations, Moran said, "The next 12 months could be fairly low to muted but the long term is positive." On his last point, the panelists all agreed the long-term outlook for HEI products is positive.
Written by Peter Murray
Notes:
For more information on HEI, visit https://dbrs.morningstar.com or contact us at info-DBRS@morningstar.com.
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