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Home Equity: Euro Heloc deal given test run

The first securitization of US home equity loan risk to be denominated in euros came to the market at the end of June via Countrywide Financial.

The deal involved a single €100 million tranche wrapped to triple A by FSA and placed by BNP Paribas with a single reverse enquiry investor. Backed by home equity lines of credit (Heloc), the deal is understood to carry pricing of 11 basis points over one-month euribor for an average life of 2.27 years.

If other US mortgage originators decide to follow suit it could herald a massive new source of euro-denominated paper for the market, if investors can strip out the associated interest rate risk (rates on home equity loans are often capped in the US).

According to Standard & Poor’s, Heloc securitization volumes fell in 2005 to around $32 billion from $37 billion in 2004, but are expected to rise again this year because of the volumes of loans that originators have amassed on their balance sheets. By issuing in euros, these lenders can tap into a vast new investor base at a time when traditional home equity buyers might be reaching their limits on exposure to the sector. Recent commentary from Deutsche Bank notes that US investors are full to the brim with triple-A home equity going into the quarter end and the bank expects to see continued softening in spreads as dealers, investors and originators lighten up on the product.

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