GlobalCapital spoke to TJ Durkin, head of structured credit and specialty finance at Angelo Gordon, a leading RMBS issuer, about the state of the RMBS market and what to look forward to in Q4 and the coming year.
Angelo Gordon has priced four RMBS deals so far this year. Its most recent deal, GCAT 2023-NQM3 was priced on September 18 and raised $362m. With an imbalance between supply and demand, Durkin expects home prices will continue to be supported in the coming year.
GlobalCapital (GC): How do you feel the year has gone so far for Angelo Gordon’s Structured Credit & Specialty Finance team and the RMBS sector?
TJ Durkin (TD): We have been happy with our execution and performance in this volatile market through the first three quarters of 2023. In addition to successfully issuing five securitizations year-to-date through September, our Structured Credit & Specialty Finance team has been active in both CRT and 2.0 CUSIPS and in providing private credit solutions to the mortgage market. We believe our diversified portfolio has material upside price convexity and we remain well-positioned to capitalize on any future dislocations. We believe these are still the early innings of a forced asset disposition cycle for regional banks, and – while housing remains strong – we are cognizant of the potential for broader volatility and the potentially higher-for-longer rate environment’s impact on the consumer, all of which should continue to create opportunities for us on a go-forward basis.
GC: How has the housing market performed this year? How might this market look different this time next year, or in five years?
TD: Housing overall has performed significantly better than we would have projected a year ago. The resilience, stronger underwriting, and ongoing supply/demand imbalance is continuing to feed solid numbers there. With materially higher base rates and a large proportion of homeowners locked into low-rate mortgages, we think the supply shortage story will continue to provide strong support for home prices. Additionally, with transaction volumes at significantly depressed levels versus recent years, we expect to see consolidation in many mortgage origination platforms, which may create additional opportunities for right-sized investors – such as Angelo Gordon – to capitalize on growth opportunities when markets eventually open back up.
GC: What is your expectation for Q4 in RMBS? Any segment especially worth noting?
TD: Going into the fourth quarter, we expect to continue to see attractive investment opportunities in the RMBS sector. With interest rate and broader equity market volatility, we could observe portfolio repositioning in both the fund/mutual fund and regional bank spaces. We believe we are well-positioned to capitalize on opportunities created by this dynamic, both in a publicly traded format and with private credit solutions.
The CRT market’s supply/demand imbalance is as apparent as ever, recording negative net issuance to date, as the Agencies continue to tender seasoned deals. Although this has contributed to rapid spread tightening over a brief period of time, we think opportunities will continue to present themselves as markets become fragmented. We have been reducing exposure and taking gains into this rally, but we fully expect better entry points to materialize, as we remain very excited about mortgage credit and the overall resilience of home prices.
GC: As we arrive at – or at least get near to – peak rates, how do you evaluate your ability to have weathered the increase in funding costs? What would you highlight about your strategy to manage the increasing rate environment?
TD: I think our team has done a good job of weathering the rate storm. Our funding base is diverse and stable, and we have been able to lock in longer-term financing with no mark-to-market – giving us ample staying power and the ability to capitalize on attractive opportunities to buy performing assets from forced sellers. We focused on balancing lower dollar optionality alongside higher carry to generate a portfolio that we believe has both high current carry and embedded price upside.
Additionally, the majority of our portfolios that utilize financing are comprised of floating-rate securities. As such, increased carry has considerably offset increasing funding costs, as well as provided some mark-to market benefit. Moreover, we actively hedge the fixed-rate portions of the portfolios in an effort to maintain a narrow duration gap, which helps curtail the impact of rising interest rates.
GC: How satisfied have you been with demand for your deals this year? Which part of the capital stack has been easier or harder to sell?
TD: Supply/demand technicals improved significantly from last year, as lower origination volumes combined with strong demand for senior debt with limited extension risk provided a healthy environment for issuance. The credit curve flattened as this year progressed, as investors became increasingly comfortable with the housing and credit resilience narrative. Although spread volatility across the capital stack remains elevated in sympathy with the broader markets, this year has been far more constructive than last – both in terms of demand for securitizations and the stability of market spreads across the capital structure.
GC: How has your funding model evolved over the past year? Have you relied more or less on the public RMBS market than previously? Which other funding sources do you use, and how has their cost and availability compared to RMBS?
The funding markets have been surprisingly resilient. This resilience has been supported by a combination of factors impacting bank lenders and their books, as significantly lower origination volumes at specialty finance companies has been coupled with strong demand from banks for short-duration floating-rate assets, such as warehouse lines they provide to those originators. Equally surprising has been banks' willingness to take more risk for better assets with more favourable regulatory treatment. RMBS issuance is likely to remain the primary funding source; however, we expect other funding sources to become increasingly competitive and compelling.
GC: How do you expect this to evolve going forward?
TD: We don’t have a crystal ball, but we expect the widely telegraphed trend of insurance companies increasingly broadening their asset allocations will likely play a more important role in funding residential and other assets going forward.