Former SoFi CEO Cagney Sells Biggest Heloc-Backed Bond in Decade

(Bloomberg) -- Mike Cagney’s blockchain lending startup Figure Technologies has provided collateral for the biggest bond backed by home equity lines of credit since the American housing collapse over a decade ago.

The $308 million unrated securitization was sponsored by alternative real estate finance firm Saluda Grade and priced earlier this week. The offering is the second securitization of Figure-originated loans and one of the first asset-backed securitizations to be completed entirely on blockchain.

The bond was backed by revolving lines of credit secured by homes known as Helocs, which disappeared following the financial crisis in 2008. Since then, banks have started originating the loans again, however more recently Wells Fargo & Co. and JPMorgan Chase & Co. have stepped back due to uncertainty stemming from the coronavirus pandemic.

“Helocs were a difficult product for banks, even before Covid, because of the way regulators treat capital against it,” Cagney, the former CEO of Social Finance Inc., commonly known as SoFi, said in an interview. “And coming into the pandemic, banks were concerned about originating the loans while borrowers are still unemployed and potentially can’t pay them back.”

Cagney helped build SoFi into one of the largest refinancers of student loans. He resigned after several workplace controversies at the firm, including allegations of sexual misconduct and a toxic work environment at the company.

Blockchain Bet

The Heloc loans backing the deal were originated, serviced, financed and sold on Figure’s affiliated blockchain, Provenance. Figure, a non-bank lender, has originated more than $1 billion of Helocs since its founding in 2018 and expects more demand for the product as the large traditional banks retrench.

Cagney says that digitally underwriting and originating the loans on blockchain makes the process less cumbersome for the borrower versus traditional origination, and more transparent for capital-markets investors. The firm recently hired former Morgan Stanley head of securitized lending Robert Hershy to help sell debt in the capital markets.

“Borrowers can go through the application process in five minutes and the loan can potentially be funded in five days,” Cagney said. The Heloc product could eventually compete with unsecured personal loans as consumers increasingly need access to cash for debt consolidation or home repairs, potentially offering lower interest rates.

According to a white paper released by Figure in March in conjunction with its first securitization, the firm claimed 117 basis points of savings to the parties involved -- including the originator, sponsor, and servicer -- as a result of the efficiencies of executing the deal on blockchain. This would represent potential savings of over $30 billion to the $3 trillion annual securitization market, the study found.

Since Provenance records transactions on an immutable ledger, the automation and speed reduces costs and increases margins, Cagney said. Operational and capital expenses are lowered, and transparency is improved because assets trade on real-time data rather than 30+ day remittance reporting cycles.

There are reservations about blockchain technology in securitization in some corners of the market, however, because of its lack of a performance history.

“It’s effectively just a ledger system; so long as the contracts are legally enforceable and assets recoverable it shouldn’t be an issue, but you never really know until it gets tested through lawsuits,” said Jason Callan, head of structured assets at Columbia Threadneedle Investments in Minneapolis. Others have expressed reservations around privacy laws, Callan said, since an open ledger might allow everyone to see the exact address of the borrower.

Heloc Comeback?

The bond was underwritten by Raymond James Financial Inc., and the largest, senior tranche of the deal will yield 3.5%. It was collateralized by a mixture of first, second, and junior liens.

“We believe there’s a huge amount of opportunity for mortgage investors in the home equity space as alternative lenders are filling the void left by banks pulling back from Heloc and second-lien offerings,” said Ryan Craft, the former head of securitized-product sales at Robert W. Baird & Co. who founded Saluda Grade in 2019. “With nearly $7 trillion of tappable home equity in the market, alternative products will continue to grow in popularity, especially for non-prime homeowners.”

The Federal Reserve Bank of New York puts the outstanding balance of Helocs at $375 billion. That balance saw an $11 billion decline in the second quarter, its fourteenth consecutive decrease since the fourth quarter of 2016.

Helocs are typically harder to package into bonds than conventional mortgages. They often allow a homeowner to borrow any time over five or 10 years. After that there’s a repayment period of 10 to 20 years. It’s typically a floating-rate loan, and can be tapped in emergency situations, such as if a borrower loses his or her job.

Changing laws have made Helocs less attractive for borrowers in recent years. The Tax Cuts and Jobs Act of 2017 affected how much of the interest on the loans can be deducted, including limiting deductions to lines of credit used for home renovations. Other post-crisis regulations sought to “shut off” Heloc capacity from borrowers if home prices fall.

Yet to the extent the loans make their way to the capital markets, the bonds may be met by interest from yield-starved investors comfortable with the collateral.

“I think any tech that can be used to improve performance disclosure would be embraced by the investor community,” said John Kerschner, head of securitized products at Janus Henderson Group.

©2020 Bloomberg L.P.