The Securities-Backed Refinance

How banks and wealth managers can help underwater homeowners.

It is a truth almost universally acknowledged that an American homeowner who is underwater on their mortgage is a drag on consumer spending and the economic recovery.

The bad news is that there are over 7 MM American homeowners who are deeply underwater, i.e. have existing mortgages with current loan-to-value (CLTV) in excess of 125%. The worse news is that over 2 MM of these homeowners are currently ineligible for government assistance on refinancing and hence likely paying a very high interest rate on their current mortgage. The good news is that a large number of these homeowners can use their liquid assets (cash and investments) to significantly lower their borrowing costs.

In our latest perspective, we propose that banks and wealth managers offer such homeowners a “Securities-backed Refinance” mortgage. We define this as a product which splits the existing mortgage into two parts – one that is secured by financial assets (a securities-backed loan) and one that is secured by the home. This can enable such homeowners to refinance into an 80% CLTV mortgage at a much lower interest rate.

This is a true win-win situation – we estimate that an “average” homeowner can save $22,000 per year over the remaining life of the mortgage, and financial institutions can benefit from building new and/or deeper relationships. We estimate that the Securities-backed Refinance represents a $1+ BN revenue opportunity, and is a great product for financial institutions looking to build deeper relationships with their existing customer base. Banks and wealth managers should quickly mobilize to design this new offering, create a targeted outreach program based on internal and external data, and leverage their distribution channels to solicit prospects.

The Securities-Backed Refinance