MBS: Opportunities Exist but Investor Interest Lags
The financial crisis of 2008 has altered the way investors view the world’s economy and especially the mortgage-backed securities sector. At the heart of the steep stock market decline and decrease in investors’ appetite for new investments was the mortgage and credit crises. In the months and years leading up to the credit markets near collapse in the fall of 2008, many large and well-known lenders throughout the developed world became far too liberal and aggressive in issuing sub-prime mortgages. These mortgages were then packaged and repackaged in hard-to-understand investments that became dangerously illiquid and unattractive to almost any investor. In the end, this hurt not only the lenders but also the market at large.
Lately, there has been some sentiment among economists that the residential real estate market has bottomed out. This may lead some to assume that there could be a trend toward investment in mortgage-backed securities by investors that want to get ahead of the industry’s recovery. However, throughout 2009 it was clear to BHA’s analyst team that investor sentiment toward mortgage-backed securities was bleak. In fact, they remained one of the least popular hedge fund strategies among investors.
In early September, an analyst spoke with the president of a wealth advisory firm based in Illinois. He articulated an interest in niche opportunities such as PIPES/Regulation D, capital structure arbitrage, and asset-based lending funds. However, he specified that the firm wanted no exposure to real estate through asset-based lending or mortgage-backed securities funds. Also, he and many of his colleagues in the industry had no plans to have any exposure to real estate-related strategies for the foreseeable future despite the fact that there was sentiment that the industry may have bottomed out.
After reviewing investment data compiled by BHA analysts and receiving similar feedback from many investors, it remains clear that the mortgage-backed securities market continues to face increased scrutiny and decreased popularity. Even those who remain optimistic about such investments admit that it will take years before mortgage-backed securities products regain investors’ trust.
A vice president of a family office in Dana Point, California, spoke with a BHA analyst in late October and again in early January regarding her interest in U.S.-focused mortgage-backed securities managers. She explained that the majority of her clients are retired individuals who have a need for steady and reliable income. As a result, she has focused her search on finding managers that offer full transparency and have portfolios comprised of “seasoned mortgages”—securities that date prior to the newer and toxic mortgage products created after 2005. Although her firm remains interested in mortgage-backed securities and considers itself an opportunistic investor, she agreed that credit markets still have to loosen up a great deal before interest in the mortgage-backed securities market returns in full force.