We have observed an increase in home improvement (HI) loan asset-backed securitization proposals over the last year, and we expect that the funding needs for these loans will likely continue to grow over the next few years.
There are several medium- and longer-term trends driving this view. First, a lack of housing affordability due to high interest rates and rising home prices has caused homeowners to renovate rather than move. Secondly, due to aging housing stock, improvements are expected to continue as new home construction takes time to add inventory.
Relatedly, a recent Redfin analysis noted that the median length of homeownership as of 2023 was about 12 years, up from 6.5 years in 2005. The homeownership rate stands at 65.6% as of Q2 2024, which, while below the recent pandemic-era peak of 67.9% in Q2 2020, stands 270 basis points higher than the 62.9% rate from Q2 2016. The growing popularity of energy efficiency and smart homes products, an increase in remote/hybrid jobs, and a recent increase in real disposable personal income (a 3.1% increase from a year ago as of August 2024 per U.S. Bureau of Economic Analysis data) should also support continued funding needs for this sector.
Alongside the increase in proposals that we've observed, the securitization market has also showed recent signs of growth: Per Green Street data, of the $6 billion in issuance over 19 transactions since 2019, half of the dollar volume was priced this year, in eight deals.
Home Improvement Loans Versus Other Forms of Unsecured Consumer/Personal Lending
The business model for HI loan lenders differs somewhat from traditional personal loan lenders.
| Comparing and contrasting home improvement and personal loan securitizations | ||||||
|---|---|---|---|---|---|---|
| Home improvement loans | Personal loans | |||||
| Typical term | Longer (15-30 years) | Shorter (2-8 years) | ||||
| Average loan size | $10,000-$20,000, but could be more than $100,000 | Typically less than $10,000 | ||||
| Loan repayment options | Standard principal and interest and deferred options | Standard principal and interest | ||||
| Permitting/inspection | Maybe required | Not required | ||||
| Disbursement | Dealers/installers | Loan obligor | ||||
| Loan purpose | Specific | General | ||||
| Source: S&P Global Ratings and Green Street. | ||||||
HI loan lenders typically work with installers who provide financing options to borrowers for their projects. HI loans may require permitting and inspection and are typically disbursed directly to third-party dealers/installers rather than to the loan obligor. Given this interdependence, loan underwriting typically incorporates the experience and track record of the dealer/installer.
Additionally, compared to general-purpose unsecured consumer loans, including loans for debt consolidation, HI loans generally have longer terms of 15-30 years, more in line with the useful life of the physical assets. Further, borrowers are typically homeowners with higher FICO scores than those in the broader unsecured personal loan sector.
Loan repayment options typically include standard amortizing loans and deferred payment options. Although the loan proceeds are used to finance the purchase and installation of equipment, there is usually no lien or senior lien created against the equipment unless the project is of high value. Some loan originators may use springing liens in their collections practices to incentivize obligor behavior if a borrower becomes delinquent.
Our Approach
Based on the proposals we have received so far, we approach HI loans as unsecured consumer loans and apply our "Global Consumer ABS Methodology And Assumptions," published March 31, 2022 . We consider some of the unique characteristics of HI loans that differentiate them from traditional personal loans.
For example, in our view there could be additional default risks tied to longer useful life and related loan tenure, complaints about the projects or installers, risks associated with disbursing funds before project completion, and operational risks associated with servicing these loans by a third party, especially if there are post-origination complaints requiring the lender's involvement.
In our analysis, we also consider whether the HI projects are completed and inspected at the time of loan repayment and whether there is an operating condition tied to external factors or an ongoing economic incentive for obligors to pay, as opposed to fixed terms and conditions. A longer performance history around these characteristics would help us better understand their impact on these increasingly common transactions.
This report does not constitute a rating action.
| Primary Contacts: | Rahul Mehta, Englewood + 1 (303) 721 4627; rahul.mehta@spglobal.com |
| Ronald G Burt, New York + 1 (212) 438 4011; ronald.burt@spglobal.com | |
| Ildiko Szilank, New York + 1 (212) 438 2614; ildiko.szilank@spglobal.com |
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