Home equity lending is rising, and Wall Street is taking notice. Lenders who were part of the Mortgage Bankers Association’s 2025 Home Equity Lending Study expect 7% year-over-year growth for home equity loan debt and nearly 10% growth in HELOC debt this year. Wall Street firms’ activity aligns with this borrowing trend. Last year, they issued about $18 billion in bonds “backed by consumer loans on everything from second mortgages to loans that get repaid from future home value”. That represents three times the amount from 2023, according to a Bloomberg article.
For investors who want to move into new mortgage asset classes, the growth of the home equity segment is promising, with some caveats. Maximizing yields requires careful pre-acquisition diligence and attentive post-acquisition management because, although these assets are relatively inexpensive, they carry higher risks than a typical 30-year agency mortgage. The heightened impact of potential defaults, bankruptcies and foreclosures on loans in a “second position,” including weaker enforcement rights, is a particular concern. This is relevant now because delinquencies and foreclosures have been increasing. In Q1 2025, the number of U.S. properties that started the foreclosure process rose 14% from the prior quarter and 2% year over year, according to ATTOM. The Mortgage Bankers Association also reported an increase in mortgage delinquencies during that time period.
Still, home equity loans and HELOCs offer favorable yields when priced and managed with expertise. Optimizing returns requires 1) a thorough understanding of every asset, pre- and post-acquisition and 2) skilled management to eliminate operational inefficiencies throughout each loan’s lifecycle that increase their risks and costs. Expert diligence and ongoing management, bolstered by AI-enabled process automation, are helping investors maximize the returns on these promising asset classes.
Gaining a Thorough Understanding of Every Loan
At the pre-acquisition stage, investors’ objective is to understand and arrive at a value for a portfolio by gaining full access to all loan-level data—from collateral quality and loan characteristics to pricing. The more thorough and accurate this data is, the more on point the valuation should be.
But the potential for inaccurate or missing data continues to make it hard to understand the full story of every home equity loan or HELOC. Finding and analyzing the underlying data is challenging when it is dispersed in systems with incompatible formats, files with handwritten notes, and trailing documents (which may also be missing or incomplete). Investors may need to pore through a daisy chain of pay histories, all recorded slightly differently, to validate loan status. Or they may need to weed through a decade of servicing comments to find a title issue resolution, or the date of the last successful borrower contact before a missed payment. Compounding the challenge: The sellers of the portfolio may have aggregated all the loan data and documents into 400-page “information blobs” with no indexing.
To solve this problem, investors are moving toward new technology-based strategies to ensure that every home equity/HELOC asset they’re studying is a best asset. They’re essentially re diligencing every loan and then making their portfolios fully searchable using solutions based on:
- Data and document management to normalize, index, and centralize all data
- AI and LLM (large language models) to validate this data, and track and reconcile discrepancies
- Digital ledger technology to make this trusted, irrefutable data available through the blockchain
These kinds of technology-enabled strategies are not only helping investors to understand every asset. Post-acquisition, they’re also enabling them to maintain the expected cash yield curves they generate at due diligence.
AI as a Focal Point
AI-enabled process automation is proving particularly valuable both during the pre-acquisition stage, and when home equity/HELOC assets are under new management.
For example, AI is making mincemeat out of diligence processes, which take on added importance in the second lien investment space. Many of these assets are private loans with varied underwriting standards. Worries about predatory lending have led to strong second-lien borrower protections, and robust enforcement of penalties for any regulatory violations.
Diligence is helping investors surface any “outliers” that could lead to yield degradation in the pool of assets and AI has become critical for finding them—extracting, organizing and analyzing information on hundreds of variables, such as late-fee terms, payment histories, signature details, maturity dates, grace periods, asset ownership and seniority, and foreclosure rights. Depending on the nature of the query, AI is zipping through an entire home equity/HELOC portfolio, containing millions of documents, in one or two days, and escalating important issues. Indeed, AI provides access to all portfolio data at unprecedented scale and speed, all at a price point that makes sampling and reliance letters obsolete in many diligence situations.
Among other current applications of this key technology for second lien investors:
- Streamlining servicing-related processes for loans under management: For instance, it can take hours to find and review two years of servicing comments for one loan, such as borrowers’ stated intentions following a missed payment and prior servicers’ workout attempts. AI has condensed this research to minutes so that servicers can take appropriate next steps, including loan modifications, to keep every asset performing.
- Optimizing operations to deal with loans in bankruptcy: It’s common for servicers to receive 80,000-100,000 emails per day about bankruptcy filings across all their portfolios, including their home equity/HELOC assets. AI is able to quickly prioritize those needing immediate action, such as adversary proceedings, cramdowns, or notices of a final cure.
- Appraisal validation using both data and photos, especially if loans’ current valuations don’t sync with broker price opinions, or if there is a chain of several different appraisals across the history of a loan.
Of course, to fully optimize the yields on home equity/HELOC portfolios, experienced investors and asset managers must hold the reins. New technologies like AI that give them unprecedented data access, and that lower the costs and risks of friction-filled operations, are redefining what best execution can look like, and making second liens an even more important contributor to the mortgage capital markets.
