Home Equity Investing’s Quiet Boom—And the Risk/Reward Equation

Nov 6

Home equity lending has become a growth market for originators, and investors are following the money. Lenders surveyed for a Mortgage Bankers Association (MBA) study project that their home equity loan originations will rise 7 percent this year compared to 2024, and their HELOC originations will go up by nearly 10 percent. Wall Street firms, in turn, have increased their home equity securitizations from 2023, issuing $18 billion in bonds “tied to home equity loans” in 2024 (Mortgage Professional America, reporting on Deutsche Bank and Bloomberg data).

The home equity segment holds great promise for investors who proceed with caution, knowing that second liens are “high risk/high reward”. As our colleague Nick Edwards recently wrote in MortgagePoint, “the heightened impact of potential defaults, bankruptcies and foreclosures on loans in a ‘second position’ … is a particular concern.” Investors need a window into risks like these, which are more than theoretical. Mortgage delinquencies have been rising, according to the MBA, as have properties in foreclosure, according to ATTOM.

Here's the good news: Rocktop’s solutions, from AI-powered document intelligence to blockchain-verified data, are already helping investors manage these risks and put more home equity yield in their pockets—especially when investors are supported by servicers with efficient, robust, and scalable processes. “Buy well; manage well” is more than a mantra for these investors; they’re walking the talk with automation. Our solutions are helping them with the following challenges.

Challenge #1—Valuation: To accurately price a portfolio of home equity loans and HELOCs pre-acquisition, investors need visibility into the story of every loan. But the required loan data is likely to be dispersed in many different systems with completely different formatting conventions. It could also be available as a several-hundred-page, disorganized blob that’s impossible to search. To find one important data point, like the date of a successful borrower contact before a missed payment, investors’ teams may have to read through 10 years of servicing comments. That’s not an efficient or practical approach to valuation when “time is money”.

Moreover, even if they can access the data, it may not be trustworthy. The plethora of spreadsheet-driven processes, and hiccups with trailing documents and servicing transfers, can lead to an untold number of errors and omissions. So can all the data/document “handoffs” between owners, servicers, custodians, and law firms.

Rocktop’s automation solutions are solving these problems for second lien/HELOC investors, empowering them to make decisions knowing that every asset is a “best asset”. These solutions are based on technologies that Nick explored, such as:

Data and document management to normalize, index, and centralize data from all different sources (even handwritten notes)
“AI and LLM (large language models) to validate this data, and track and reconcile discrepancies”
“Digital ledger technology to make this trusted, irrefutable data available through the blockchain”

As a result, our clients are committing to valuations and initiating purchases with confidence.

Challenge #2—Diligence: Thorough diligence is extremely important with portfolios that contain second liens, which could include thousands of private loans made by lenders with a wide variety of underwriting standards.

Rocktop’s robust, AI-driven solutions are improving these processes at eye-popping speeds. They often zip through millions of documents in one or two days—surfacing any anomalies with payment histories, signature details, asset ownership and seniority, and other loan-level variables that could be red flags.

In many instances, these solutions have made traditional sampling processes obsolete. Why take a week or longer to pore through 10% of the loans in a portfolio when it’s easy to diligence every one, across hundreds of variables, in days or even hours, and gain a much deeper understanding of their potential risks and upsides?

Challenge #3—Efficient Servicing for Better Management: With second liens, as with any asset class, the stronger servicers’ processes are, the better investors’ outcomes will be. Any servicing roadblocks or frictions add time, costs and risks to management.

For example, some servicers often receive 80,000-100,000 emails per day about bankruptcy filings across their portfolios. Rocktop’s Foreclosure Document Monitor solution, using AI, quickly surfaces the far smaller subset of filings requiring immediate action, from cramdowns to adversary proceedings, so servicers can triage and prioritize. Another example: Rocktop’s 410A solution, again applying AI, shortens the process of completing and validating Form 410A bankruptcy filings from 4-8 hours to 5-10 minutes. The efficiencies of solutions like these, especially when used at scale, are mind boggling.

If you believe our solutions might help you improve your second-lien investment and management opportunities, please contact Rob Behrend through LinkedIn or at rbehrend@rocktop.io.