Non-Agency Mortgage-Backed Securities (RMBS) Opportunities in 2021
by Semper Capital, on Mar 31, 2021
- Agency Credit Risk Transfer: Backed by high quality pools of agency borrowers (with average FICO scores in the mid 700 range and mid 30s debt to income ratios (DTI), these bonds offer investors opportunities to access mortgage credit and express credit views of housing and loan performance. The collateral has continued to outperform initial expectations related to the pandemic and continues to benefit from programs designed by the FHFA and GSEs relating to forbearance and loss mitigation. Subordinated B1 and B2 profiles currently yield between 4-7% with mezzanine bonds yielding in the 3% range. Many prices remain at a discount to par, and the sector’s significant liquidity affords active management opportunities
- Non-Qualified Mortgages: Although these borrowers don’t qualify for agency purchase and are not as high quality as prime jumbo loans, the average quality of these borrowers is very high relative to that of pre-financial crisis borrowers. Mezzanine bonds currently yield about 4-5% with 3 – 5 year durations, and collateral enhancement well in excess of worst case loss scenarios. These bonds have delevered much more than loss expectations have increased. Prices have the opportunity to appreciate another several percent if spreads revert to early 2020 levels
- Prime Jumbo 2.0: Backed by the highest credit quality borrowers in RMBS, deals had muted forbearance take-up rates at the height of the pandemic. Strong performance along with rapid prepays are leading to credit enhancement buildup, future upgrade opportunities, and spread tightening on jumbo mezzanine profiles, supporting near term price appreciation
- Non-Performing Loan Securitizations: NPLs, especially those collateralized largely by REO properties, have benefited from robust 2020 HPA growth, limited new issue supply, and improving credit fundamentals. NPL issuers continue selling re-performing loans and REOs out of existing structures rapidly delevering these structures. Many subordinate bonds remain below par, and currently yield in excess of 5% expected yield. We expect price appreciation from early calls or spread tightening
- Mezzanine Tranches of Single-Family Rental Securitizations: The SFR sector has been one of the strongest performing sectors fundamentally since last March driven by high quality tenants, a long term demographic demand for single family rentals, and sophisticated SFR operators. Rental collections and revenue growth during the pandemic have remained in line with or better than previous periods, while SFR collateral has benefited from levels of HPA higher than the national average. Mezzanine profiles in the sector currently yield 3-5+%
- Fannie Mae and Freddie Mac Multifamily Securitizations: GSE deals have seen continued low delinquencies rates and rental collections have remained well above initial pandemic expectations. In our view these securities have always been fundamentally mispriced, given historical performance, strong collateral underwriting, and experienced property sponsors. Similar to CRT, assistance programs offered during the pandemic have aided the few borrowers who faced disruption. We believe this sector will continue to offer strong total return, strong fundamentals can be accessed via securities with discount dollar prices, intermediate to long spread duration, and material upside to spread tightening and collateral prepayments
Today’s housing and RMBS markets are vastly stronger across any range of metrics, and we expect valuations to increasingly be reflective of this strength leading to our expectation that RMBS will be a leading performer on a risk-adjusted basis in 2021.
Opinions expressed in this document represent the views of Semper Capital Management, L.P., are valid only as of the date indicated, and are subject to change without notice. There can be no guarantee that any of the opinions expressed in this document or any underlying position will be maintained at the time of this presentation or thereafter. We are not soliciting or recommending any action based on this material. The information contained herein has been prepared solely for informational purposes and is not an offer to buy or sell or a solicitation of an offer to buy or sell any securities.
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