Diving into Non-Agency
RMBS: The Wild West of Mortgage Investing
For those interested in the nitty-gritty of the mortgage
world, non-agency RMBS, also known as private label RMBS, offer a high-risk,
high-reward investment opportunity. But before you jump in, it's crucial to
understand what you're getting into.
Breaking it Down: Non-Agency vs. Agency RMBS
Most people are familiar with agency RMBS, those backed by
government-sponsored enterprises (GSEs) like Fannie Mae and Freddie Mac. These
offer stability with a government guarantee in case borrowers default.
Non-agency RMBS, on the other hand, are the rebels
of the mortgage world. Issued by private institutions like banks and investment
firms, they hold mortgages that don't meet the GSEs' strict criteria. This
could be due to loan size, borrower creditworthiness, or property type.
The Allure of Non-Agency RMBS
So, why invest in something riskier? The potential payoff:
- Higher Returns: Since they carry more risk, non-agency RMBS can offer significantly
higher yields compared to agency counterparts.
- Greater Diversification: Non-agency RMBS can add diversification to your portfolio, as their
performance isn't tied to the government.
Understanding the Risks
But with great reward comes great risk. Here's what to
watch out for:
- Increased Default Rates: The very reason these mortgages aren't agency-approved is that they
carry a higher chance of default.
- Lower Liquidity: The non-agency market is smaller and less transparent, making it
harder to buy and sell these securities.
- Complex Analysis: Analyzing non-agency RMBS requires deep dives into the underlying
loans, making them unsuitable for casual investors.
Non-Agency RMBS: Not for the Faint of Heart
Investing in non-agency RMBS requires a strong
understanding of the mortgage market, risk tolerance for potential defaults,
and the ability to analyze complex financial instruments.
Loan types may use Debt Service Ratios, alternative
documentation for income, and only want prime locations. If you're a seasoned
investor seeking high returns and portfolio diversification, non-agency RMBS
could be an option. But for everyone else, proceed with caution and do your
research before diving into this wild west of mortgage investing.
It's important to understand that private label non-agency
RMBS aren't issued by lenders themselves, but rather by investment banks and
financial institutions who pool together mortgages that don't meet agency
standards and then issue them as securities.
Here's why lenders aren't directly involved:
- Origination vs. Securitization: Lenders originate mortgages, meaning they connect
borrowers with loans. Securitization, on the other hand, is the process of
pooling those mortgages and turning them into tradable securities like
non-agency RMBS.
- Risk Distribution: By securitizing non-agency mortgages, lenders spread the risk of
defaults across investors who purchase the RMBS.
However, if you're interested in which institutions might
be originating the underlying mortgages for non-agency RMBS, here are some
examples:
- Regional Banks: Many regional banks originate non-jumbo mortgages (loans exceeding
conforming loan limits set by Fannie Mae and Freddie Mac) that could end
up in non-agency RMBS.
- Mortgage REITs (Real Estate Investment Trusts): These firms invest in real
estate-related assets, and non-agency mortgages can be a part of their
portfolio.
- Non-Bank Lenders: Specialty lenders who cater to borrowers with lower credit scores
or those seeking alternative financing options might originate mortgages
that get packaged into non-agency RMBS.
·
Hard Money Loans: Hard money loans, which are short-term, asset-based loans
secured by real estate. Typically, eighteen months terms. These loans are for
borrowers who might not qualify for traditional bank financing.
·
Non-Agency RMBS: Non-agency RMBS, on the other hand, are securities created by
pooling together mortgages that don't meet the standards of government-backed
institutions like Fannie Mae and Freddie Mac. These are then sold to investors.
The Difference:
·
Lending vs. Securitization: A hard money company acts
as a lender, providing financing directly to borrowers. Non-agency RMBS deal
with securitization, which is the process of transforming numerous loans into
tradable securities.
·
Loan Focus: Hard money loans are not usually securitized and packaged into
non-agency RMBS but sometimes they are bundled together with similar mortgages.
Since they do not fit with GSE criteria it is difficult to determine the ability
for these loans to perform or rate them.
