Why the us mortgage market is attractive to investors again

Tom Mansley, Investment Director at GAM

From a fundamental perspective, U.S. residential real estate markets are much more robust than they were before the crisis, says Tom Mansley, investment director at GAM.

Low volatility profile and solid yield the so-called mortgage-backed securities (MBS) have recently outperformed many other high and mid-quality securities. Since the financial crisis, during which MBS assets came under severe pressure, the mortgage market in the U.S. has undergone radical reform. "Investors looking for a well-diversified, global, fixed income strategy should take a very close look at the enhanced offering", Says Tom Mansley, investment director at GAM. "The opportunity is almost too good to pass up."

Lending standards are being closely monitored
MBS are securities backed by a pool of mortgage loans that give investors a right to the cash flows from those mortgage loans. Thus, they exhibit a low correlation to equities and traditional bonds. "Meanwhile, most MBS on the market are so-called 'agency securities' backed or recognized by the U.S. government or one of its agencies, Freddie Mac or Fannie Mae", says Mansley, who works in GAM's New York office. "But there are also non-agency MBS, which are bonds issued by private issuers such as banks, and these securities have no government guarantee." Therefore, they offer a higher rate of return, but also come with a correspondingly higher risk of default, he said.

If MBSs were still instrumental in creating the financial crisis, the requirements for the securities and the loans behind them would have improved considerably. "Lending standards have increased dramatically and are closely monitored", says Mansely. "Complete mortgage financing is no longer available, borrowers have to come up with a not inconsiderable down payment themselves." In addition, credit rating agencies now factor a broader range of possible negative scenarios into the calculation of MBS ratings.

Interesting investment option despite political uncertainty
"From a fundamental perspective, U.S. residential real estate markets are much more robust than before the crisis", Mansley says. According to financial market analyst CoreLogic, 2.6 percent of mortgage loans in the U.S. were more than 90 days delinquent at the end of last year and are therefore considered non-performing. "That is about one million credits. In comparison, the number of nonperforming mortgage loans during the height of the crisis in January 2010 was 3.7 million." In addition, the number of necessary foreclosures dropped 30 percent in 2016 compared to the previous year, he said.

While there is a possible scenario that under U.S. President Donald Trump, the government's influence on the mortgage and real estate market could diminish. However, this would be a slow process as the Trump administration clearly has other priorities at the moment. If legislative changes do occur this year, they will likely be aimed at reviving a larger and more efficient market for nonagency mortgage securities.

"The asset class currently shows demonstrable merits in terms of yield, capital preservation and diversification", says Mansley. "In our opinion, there are some really interesting investment opportunities here that you don't want to miss out on."

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