Key facts
- Saluda Grade believes home equity assets are resilient to current interest rates and consumer financial stress.
- The firm points to homeowners' average mortgage rates around 4.5% versus current rates near 6.5% as a driver for tapping equity.
- The U.S. has approximately $35 trillion in home equity in single-family residential housing.
- Saluda Grade's portfolio of approximately $4 billion, primarily residential assets, is performing well with comfortable delinquency levels.
- The firm forecasts $150 billion in second-lien production by 2026.
- Saluda Grade's weighted average FICO score for second liens and residential transition loans is 750.
Alternative investment firm Saluda Grade remains optimistic about the resilience of home equity assets, even amidst broader macroeconomic concerns like rising interest rates and consumer financial stress. Blake Eger, Saluda Grade's head of private credit and senior portfolio manager, stated that a significant portion of homeowners are locked into low mortgage rates, creating an incentive to tap into their home equity rather than refinance.
Eger highlighted the vast amount of equity accumulated in the U.S. residential housing market, estimated at $35 trillion, which Saluda Grade aims to finance. She also pointed to a persistent housing supply shortage of approximately 3.5 million homes, increasing household formations, and aging housing stock as supportive factors for the market.
Despite acknowledging headlines about increased delinquencies in broader consumer loans, Eger reported that Saluda Grade's own portfolio, which is largely composed of residential assets and totals about $4 billion, is performing well with comfortable delinquency levels. The firm anticipates a robust market for second-lien production, forecasting $150 billion by 2026.
Saluda Grade emphasizes its focus on prime borrowers, with a weighted average FICO score of 750 across its second lien and residential transition loan portfolios. Eger also noted that home equity agreements are designed for individuals who may not qualify for traditional mortgages, often resulting in lower FICO scores, and serve as a tool to pay down expensive debt.
The firm is strategically expanding its asset-backed finance (ABF) approach beyond residential to include commercial and non-housing sectors, following its acquisition of Hillcrest Finance and exploring opportunities in home improvement, manufactured housing, and solar loans. Saluda Grade prefers ABF over corporate direct lending due to its diversification benefits and contractual cash flows. Eger believes that regulatory changes and the retreat of banks from certain lending areas have created opportunities for private credit funds like Saluda Grade to fill the void, with minimal expected impact from upcoming Basel III regulations on their strategies.