By Miles Weiss || Bloomberg
DoubleLine Capital is embarking on a plan to originate and securitize mortgages, seeking to fill a niche that has traditionally belonged to banks and brokerage firms.
The Los Angeles-based money manager, headed by Jeffrey Gundlach, is starting an investment advisor called Mortgage Opportunities Capital, according to regulatory filings. It will be an integral part of DoubleLine’s plan to raise capital from institutional investors to originate or buy commercial and residential real-estate loans and package at least some into securitized debt.
DoubleLine’s move comes amid a dwindling supply of mortgage bonds that aren’t guaranteed by the government through Freddie Mac or Fannie Mae. While these private-label securities were once a huge source of business for banks and brokerages, they have largely stopped issuing non-agency residential bonds under the weight of post-crisis regulations, creating an opportunity for asset managers.
“There is an emerging trend by money managers to evaluate whether they should fill the void,” said Thomas Capasse, a managing partner at Waterfall Asset Management, a New York-based investor in mortgage bonds and other types of structured securities. “The opportunity exists due to the retrenchment by Street firms.”
Loren Fleckenstein, a DoubleLine spokesman, declined to comment on the initiative.
Investment managers such as Invictus Capital Partners, Varde Management, and Angel Oak Capital Advisors have already gotten into the mortgage securitization business. Rather than investing in bonds put together by other issuers, these asset managers can control the quality of the underlying loans, take advantage of the low cost of financing the debt with MBS, and earn the same types of leveraged profits that banks reap on the spread between the rate at which they lend and the rate at which they borrow.
Control Own Destiny
“In a way, we are controlling our own return destiny,” said John Hsu, head of capital markets for Atlanta-based Angel Oak. “We are determining what we feel to be good credits,” he said, adding “our cost of debt has gone down dramatically.”
DoubleLine’s securitization business may help the firm diversify. While its flagship Total Return Bond Fund, which invests heavily in agency and non-agency MBS, has seen assets slip this year, they rose firm-wide to $116 billion as of October from $101 billion at the end of 2016.
A number of institutional investors, including the Philadelphia Museum of Art, Fairfax County Employees’ Retirement System, NPR Foundation and St. Lawrence University, agreed to back DoubleLine’s mortgage strategy in September through the purchase of partnership interests or notes issued by an Irish affiliate, according to regulatory filings. DoubleLine’s Irish mortgage opportunities affiliates also entered into a revolving credit agreement with Wells Fargo & Co. the following month.
Mike Pratt, the president of New York-based Scherman Foundation, said his organization invested in DoubleLine Mortgage Opportunities because it was exploiting a market that other investors may have missed. The venture also has an element of helping potential homebuyers get access to financing, said Pratt, whose foundation supports causes related to climate control, social justice and reproductive rights.
“This has the advantage of supporting mortgages that should be supported but sometimes get lost in the generalization of being questionable,” Pratt said.
The new venture positions DoubleLine to take advantage of mortgage market opportunities by acquiring loans to home buyers who don’t qualify for conventional mortgages, even if they have perfect credit scores. Interest rates on these mortgages have been slowly rising this year even as the cost of financing the loans through securitizations becomes more favorable, allowing sponsors like DoubleLine Mortgage Opportunities Capital to potentially earn a wider spread on the deals.
“Rates have been ticking higher on the mortgage origination, while the spreads at which bonds can be securitized are creeping tighter,” said Neil Aggarwal, head of RMBS and portfolio manager at Semper Capital Management in New York.
Mortgage Opportunities Capital and its affiliates plan to either purchase or originate mortgages on commercial buildings while buying home loans from banks, institutional investors or mortgage originators, according to company filings. It also intends to use its relationships with Wall Street brokers and institutional investors “to source assets,” the documents say.
The firm also started DoubleLine Mortgage Opportunities Master Fund LP, a private-equity pool, which raised almost $296 million earlier this year to originate and invest in mortgages, according to U.S. Securities and Exchange Commission filings. The private equity fund owns Mortgage Opportunities Capital and may also provide it with loans to securitize, the filings show.
Mortgage Opportunities Capital or its affiliates would also have to retain at least 5 percent of each residential securitization whose underlying bonds don’t meet qualifications laid out in the Dodd-Frank law. These risk retention pieces must be held for at least five years, making them suitable for a private-equity fund that locks up investor capital for multi-year periods.
The amount of private-label RMBS outstanding has shrunk to $486 billion at the midpoint of this year from some $2.2 trillion at the end of 2006, according to Guy Cecala, publisher of Inside Mortgage Finance. Older bonds have either been paid down or wiped out through defaults and foreclosures. Banks have stopped issuing private-label debt for a host of reasons, ranging from regulatory burdens to investor reluctance to hold mortgage securities that aren’t backed by the federal government.
As a result, an entire class of potential borrowers has been shut out of the housing recovery, mainly because their loans won’t qualify under standards set through Dodd-Frank. While these non-qualifying loans carry higher interest rates, they are often extended to borrowers with excellent credit who don’t meet new standards, perhaps because they are self-employed, making it difficult for lenders to verify their income.
“After the subprime mortgage crisis, hardly anyone would touch this stuff with a 10 foot pole,” Cecala said, referring to private-label residential mortgage bonds. Now “investor demand is pretty strong for these because they come with a higher yield.”
— With assistance by Adam Tempkin, and John Gittelsohn