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BofA, Bank One Ending Heloc Holdout
Asset Backed Alert, Harrison Scott Publications Inc. (January 21, 2005)

Bank of America and Bank One are among several banks that may take advantage of recent tax-code changes by securitizing their home-equity lines of credit.

Under a federal law that took effect on Jan. 1, lenders can use real estate mortgage investment conduits (Remics) to sell bonds backed by their home-equity lines - making securitization a far more appealing means of funding the credits than ever before.

Until now, lenders could only securitize their home-equity lines through owner trusts or now-defunct financial asset securitization investment trusts (Fasits). Those structures made it difficult to assemble deals with subordinate classes carrying multiple maturities, and generally required bond insurance. But by using Remics, lenders can easily piece together so-called senior/sub transactions - potentially bringing securitization costs on par with funding home-equity lines through deposits, said Jon D. Van Gorp, a partner at the law firm of Mayer Brown.

With a few exceptions, those costs have kept banks out of the market, making home-equity line securitizations the domain of whole-loan buyers and specialty-finance houses such as Countrywide Home Loans, GMAC's Residential Funding Corp., GreenPoint Mortgage and Impac Mortgage.

Those lenders, like the banks, will take advantage of the availability of Remics. But they're less likely to adjust their overall securitization volumes in response to the new rules. Still, the first home-equity line securitization to employ a Remic structure is expected to come from a specialty-finance company that's already a routine issuer. It will likely hit the market within a few months.

BofA and Bank One, meanwhile, are looking at later this year to set up securitization programs for the home-equity lines they write. BofA would be a first-time issuer in the asset class. Bank One, a unit of J.P. Morgan Chase, last securitized its home-equity lines in 1999.

The availability of Remics also has lenders talking about selling bonds backed by the excess interest, or net interest margin, from their securitizations of home-equity lines. Also look for more deals involving home-equity lines that are written simultaneously with first-lien mortgages, said Dominion analyst Ken Higgins.

The timing is certainly right for banks to jump into the market, since many amassed large portfolios of home-equity lines in recent years and could benefit by shifting them into securitization trusts before interest rates rise. Those institutions' investment-banking arms are also setting up whole-loan desks that would trade home-equity lines.

Even with banks becoming bigger issuers of home-equity line securities, the asset class isn't expected to produce 2005 volume that would be much more than the $36.4 billion of deals that hit the market last year.



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