Institutional investors are moving back into residential mortgage-backed securities, even as lawsuit settlements are giving them back some of the money they lost on RMBS investments made before the financial crisis.
But industry executives say it's different this time.
Asset owners invested about $500 billion in mortgage-backed securities and other mortgage investments in 2014, up 25% from 2010, according to the most recent data from the Federal Reserve.
Some investors are making direct investment in RMBS. The federal government backs a so-called agency market worth $5.2 trillion, while the non-agency RMBS market was $668.5 billion as of Nov. 30, according to data from Bank of America Merrill Lynch. Investors in non-agency RMBS include the $180 billion New York State Common Retirement Fund, which in February committed $250 million to New York-based fixed-income manager Semper Capital Management LP.
Many are getting exposure primarily to agency RMBS through their core-plus fixed-income portfolios. The average exposure to RMBS in the typical core-plus bond portfolio is 23.4%, according to a report to the Oregon Investment Council by Callan Associates, its general investment consultant.
New York State Common's investment with Semper is being made as part of its fixed-income portfolio, said spokesman Matthew Sweeney. “It's structured, so requires a bit more technical expertise,” he said in an e-mail. “(Semper) has a long-standing and successful track record.”
Some 10.9% of the Salem-based Oregon Public Employees Retirement Fund's $14.9 billion fixed-income portfolio is invested in domestic agency RMBS, the Callan report shows.
The securities of 2016 are not the rapid-fire originations that totaled $2.2 trillion at their peak in 2007, investors and credit managers say. Regulatory changes have made the securities less risky, noted one institutional investor. What's more, there have been few non-agency securities issued since the financial crisis, so asset owners are investing in older securities. The advantage, managers say, is that with older RMBS investors know which borrowers are paying down their mortgages and which ones have defaulted or are in the process of defaulting.