A report from the Wall Street Journal. "Cerberus Capital Management LP is bringing back a type of mortgage bond that went extinct during the financial crisis. A unit of the private-equity firm issued bonds Friday backed entirely by home-equity lines of credit. The $174 million issuance received a triple-A rating from four agencies including Fitch Ratings. Mortgage bonds pooling esoteric pieces of the home-loan market have been mostly out of style in the decade since the housing market collapsed, a period when government-backed entities ended up standing behind much of the mortgage market."

"But some structures have slowly returned, including bonds that hold unconventional mortgages resembling the Alt-A home loans of yesteryear for borrowers with hard-to-document income. There have also been a handful of deals involving fix-and-flip loans, and a market for single-family rental bonds emerged after the financial crisis."

"'We are starting to have a lot more creative issuance around mortgage credit,' said Neil Aggarwal, deputy chief investment officer at Semper Capital Management. 'I wouldn’t be surprised if there’s more to follow after this transaction.'"

"Home-equity lines of credit are more like credit cards in that borrowers can draw upon them as needed, sometimes to make repairs or pay bills. They typically come with floating interest rates that are, on average, higher than those of a conventional mortgage. While demand among homeowners for products to tap into home equity has been relatively static, it’s starting to creep up. Mortgage refinancings in which borrowers pull cash out of their homes have been popular recently."

From The Real Deal. "Something about this moment seems all too familiar. Prior to the financial crisis, small mortgage companies were lending to thousands of homeowners throughout the country with the backing of credit lines from the largest banks. Now, more than a decade later, nonbank lenders are once again ramping up their mortgage lending in the U.S. and South Florida with credit lines from America’s largest financial institutions."

"These nonbank lenders such as Quicken Loans, Freedom Mortgage and loanDepot claim they aren’t making risky loans, but are instead filling a void by offering home mortgages in just a few days instead of the weeks that it would take banks to issue such loans. At the same time, local banks have also pulled back from originating residential mortgages. Take for example South Florida’s largest bank, Miami Lakes-based BankUnited, which announced in 2016 that it would no longer originate residential mortgages. Other banks across the country, including HomeStreet Bank in Seattle, are backing away from the mortgage business."

"Raj Singh, the current CEO of BankUnited, said residential mortgages are a low-margin business that is very competitive. Profits are highly dependent on interest rates. 'I think it’s tough for regional banks with residential lending… at best you will break even,' he said."

"While some say nonbanks are filling a need to low-income and moderate-income borrowers, critics wonder whether these new entities are taking on too much risk and could run into liquidity issues if the economy were to head into a recession, leaving the government to clean up the mess. 'One of the things that saved the mortgage market during the financial crisis was… there were large banks to pay fines,' said Edward Pinto, a co-director of Housing Markets and Finance at the conservative think tank AEI. 'The nonbanks just don’t have those type of assets.'"

"'Companies like Quicken stepped into the breach to become national lenders. They really weren’t scared to go down on credit scores,' said Ted Tozer, the former president of Ginnie Mae from 2010 to 2017. Tozer called these nonbanks 'one trick ponies' that were able to devote all of their resources and money to making the mortgage process more efficient. Detroit-based Quicken Loans — second in the ranking, with $848.2 million in mortgage loans issued — became one of the most well-known and successful nonbank lenders through its online platform called Rocket Mortgage, which claimed it could close on a mortgage in eight days."

"During his tenure at Ginnie Mae, Tozer was beginning to notice that some of these new lenders that were filling this void were also taking on a lot of risk. Many of these nonbank loans were guaranteed by Ginnie Mae, and Tozer worried about what would happen if the economy soured and borrowers started to fall behind on their loan payments."

"These nonbanks will still have to service these loans, meaning that they would have to make interest payments on the loans until they go into foreclosure. Nonbanks don’t have access to the same government resources as banks, and if lenders pulled back on their financing, nonbanks could run out of cash to keep making loans. 'The issuers that we had to deal with, they weren’t insolvent, they ran out of cash,' Tozer said."

"To observers of the financial markets, this may sound familiar. Investment banking powerhouse Bear Stearns collapsed in 2008 not from insolvency but because of a run on the bank. Bear Stearns investors started to pull their money out of the banks, and the bank ran out of cash before JPMorgan bought it for $2 a share."

"Josh Migdal, an attorney with Miami-based Mark Migdal & Hayden, said that these nonbanks are threatened when warehouse lenders re-price their lines of credit and borrower delinquency increases. 'To stave off insolvency, nonbanks will need to expedite the foreclosure process to stop the bleeding that will be caused by having to fund servicing advances while a loan is in default,' he said."

"Since these nonbanks are the largest providers of these loans, a widespread collapse of this industry could be devastating to the housing market. If nonbanks stopped lending, it could create a domino effect where home buyers would not be able to get a loan. 'If that does happen, then mortgage bankers have to start hoarding cash, then they are not going to make new FHA or VA loans,' Tozer said."

"But if a recession arrives, borrowers buying homes at the end of the cycle would once again be hurt the worst, Pinto said. The issue is compounded by nonbank lenders, which are providing riskier loans than banks, which is allowing people to purchase homes that they ordinarily could not afford, he said. If borrowers start defaulting, it could quickly lead to major issues with nonbank lenders. 'Even with a small bank, you are not worried about them not being able to honor their obligations,' Pinto said. 'You can’t say the same thing about nonbanks. They don’t have anywhere near that capital.'"