(Bloomberg) -- Americans borrowing against their homes after a surge in real estate prices are creating a $2 trillion opportunity for investors, according to TPG Angelo Gordon.
“We’re seeing the evolution of home equity products,” TJ Durkin, the firm’s head of structured credit and specialty finance, said in the latest Bloomberg Intelligence Credit Edge podcast. “There could be $150 to $200 billion of origination per year, with a $2 trillion really addressable market there.”
Consumers have seen the value of their residences surge since the pandemic. But rates have risen steeply since 2022, making it less attractive for US homeowners to pull out equity by refinancing existing low-rate mortgages with even bigger loans, known as a cash-out refinancing.
That’s boosted demand for home equity products such as lines of credit and second lien debt, Durkin said. Those new, smaller loans can allow borrowers to tap into home equity without losing existing mortgages.
Click here to listen to the full interview with TPG Angelo Gordon’s Durkin
Home equity line of credit balances rose by $7 billion during the third quarter, according to Federal Reserve Bank of New York data. That’s the tenth consecutive quarterly increase, to about $387 billion in outstanding HELOCs.
“We think the credit is pristine at this point,” said Durkin. “That’s a space where we’re looking to get deployed quickly,” he added, noting the potential for credit standards to loosen as more investors jump in.
One of TPG Angelo Gordon’s focuses is structured products — including collateralized loan obligations and commercial real estate — and asset-based debt, both in public and private markets. It had about $88 billion of assets under management as of September, according to its website.
The firm also sees value in commercial mortgage-backed bonds, despite pockets of stress. Durkin says a key risk to be cognizant of for CMBS is how long it will take to get repaid, as borrowers can often extend underlying loans for multiple years before refinancing.
“That’s where we spent a lot of time the last couple of years and it’s been a fertile hunting ground for discounted but performing securities,” Durkin said, referring to CMBS. “Coming in with fresh capital, an opportunistic lens, I think that’s the most interesting space that we’re seeing in the public markets.”
CMBS without agency backing have experienced a sort of comeback recently, with sales running about 160% higher than at this time last year, according to data compiled by Bloomberg. Still, some bonds trade at a steep discount, especially those tied to a single building or borrower.
TPG Angelo Gordon is also looking to ride the asset-based finance wave, where private credit funds extend debt against streams of contractual cash flows tied to a defined pool of assets. That can be anything from real estate and auto loans to equipment-lease debt.
Durkin anticipates that will grow to a $7 trillion-to-$10 trillion market as banks continue to sell loan portfolios, carve out businesses that are no longer considered core and generally retrench from lending.
US household debt jumped to a fresh high last quarter, with lower-income groups showing signs of strain. Early delinquency transitions on auto loans, and the share of that debt now in serious delinquency, hit the highest since 2010.
“The weaker consumer demographic is feeling the pain of inflation more,” said Durkin “That’s where you really need to do the work.”
On the podcast, Durkin also discussed:
- Why he thinks structured product issuance will continue to grow, even after hitting a record this year, boosted by esoteric deals and data-center financing
- Interplay between private and public markets for asset-based finance, including warehouse debt and forward-flow deals
- The 2025 outlook for synthetic risk transfers tied to corporate deals
- The mergers and acquisition environment under the next US government, particularly for banks
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