Mortgage-backed securities are heavily associated with the 2008 financial crisis. This is keeping most money managers away, but some single family offices say they are allocating to the product.
By Annabelle Liang
Mortgage-backed securities (MBS) still carry a big, bad reputation for fronting the biggest financial crisis since the Great Depression.
The time between 2008 and now hasn’t improved its case. Neither has the US Federal Reserve’s pledge to make unlimited purchases of agency MBS, spurred by the Covid-19 outbreak, to keep credit markets afloat.
‘Those who lived through the global financial crisis would be wary,’ said Anson Sng, CEO of Raintree Asset Management, which doesn’t allocate to MBS.
‘The Fed has pledged unlimited purchases for agency MBS but not non-agency MBS. The difference in yield between the two is glaring.’
Agency MBS have a yield of 1.75% to 2.5%, while non-agency residential MBS yield 3.5% to 5%. Meanwhile, commercial MBS yield 4% to 8%, AllianceBernstein estimates.
In all the variations, investors are essentially lending money to property buyers and trusting that they will make payments to issuers.
History is not on their side. During the real estate boom in the early 2000s, some issuers didn’t confirm that borrowers could pay mortgages, before repackaging them as MBS.
There were many defaults – and issuers and investors were badly hit. The unravelling kicked off a global financial crisis.
‘The question is whether stress in MBS will spill over to other parts of the financial markets when tenants default. The Fed seems to be a lot more proactive this time around,’ Sng said.
‘I don’t think it will be an issue if the lockdown is lifted within a month to a quarter. It could be an issue if this lasts beyond that.’
Hong Kong’s Adamas Asset Management blamed the lack of interest on complexity.
While its high-net-worth clients like real estate investments, they are keen on assets and related equities, such as real estate investment trusts.
‘To the extent there is MBS interest, it’s more likely to be indirect. That’s a safer bet, as investors need less specialised knowledge and are easily diversified,’ CIO Brock Silvers said.
‘For us, non-agency markets seem potentially perilous in the current environment, as we’re expecting a regional economic downturn.
‘That means an uptick in delinquencies, but one that’s still undefined and with significant potential variance,’ Silvers said.
Family office interest
When approached, eight out of 10 family offices said they had virtually no exposure to MBS.
But at least two single-family offices invest in the space. Windsor Family Office has put about $32m in MBS and plans to increase its exposure soon.
It prefers agency to non-agency MBS because of the alpha potential in liquidity and credit quality. Meanwhile, it steers clear of commercial MBS, as the market is currently taking a hit.
Chairman Youssry Henien said the family office sees ‘potential benefits’ in the product, that has also drawn allocations from financial institutions and the Fed.
‘As an optimistic investor, I am quite hopeful that we will not see the same magnitude of distress as we did in 2008.
‘However, the coronavirus puts pressure on those that are unable to pay their dues on time. The subprime mortgage crisis is happening, and I do see damages caused coming to light soon,’ Henien said.
Tsao Family Office expects the US government to start a broad forbearance programme for mortgage payments, lasting for a year or two, while the economy gets back on its feet.
The family office has some exposure to US mortgages, through funds investing in asset-backed securities.
‘We believe that the US consumer, prior to Covid-19, is much healthier than during the global financial crisis,’ investment director Leslie Lim said.
‘Unlike corporates, households have actually deleveraged over the past decade. Supply and demand fundamentals are a lot more robust and underwriting standards today are not an issue.’
Still, Envysion Wealth Management remains unconvinced. CEO and founder Veronica Shim said there is still a high probability of defaults, given the recent surge in US non-farm payroll and unemployment numbers.
‘The prices of MBS may be stabilised [with the Fed’s buys] but the underlying problem has not been resolved.
‘This problem is that mortgagers could potentially default, because an increasing number of them do not have a job,’ Shim said.
Her multi-family office manages between $300m and $400m for roughly 20 families in the Middle East, North Asia and Southeast Asia.
This feature was first published in the May issue of Citywire Asia’s Private Wealth magazine.
Source: https://citywire.com/asia/news/mbs-most-stay-away-but-some-single-family-offices-bite/a1375793