Invesco Mortgage Capital Inc. (IVR) bought all of the residential mortgage-backed securities created last month in a $300 million deal without government backing, amid lower demand for the top-rated portions of such transactions that’s stunted a revival in the non-agency bond market.
The company was attracted to potentially higher returns on the slices created after other investors pulled back, according toBill Hensel, a spokesman for the Atlanta-based real-estate investment trust overseen by Invesco Ltd. The purchases in the fifth transaction this year created out of prime-jumbo U.S. home loans for Invesco Mortgage by Credit Suisse Group AG (CSGN) represent a switch from REITs’ typical strategy of acquiring just the highest-yielding, junior-ranking slices in such deals.
“We like the current levered return on this compared to agency RMBS, so for this one, we kept the AAA rather than selling it,” Hensel said in an e-mail.
While issuance of non-agency securities tied to new loans has climbed to about $13.4 billion in 2013 from $3.5 billion in all of last year, the pace has slumped since July, as investors demanded higher yields and banks retained more loans, according to data compiled by Bloomberg.
Analysts at Bank of America Corp. and Credit Suisse in 2014 outlooks published last month forecast a drop or little change in issuance, after the AAA securities went from being sold at the same or higher prices than similar U.S.-backed agency mortgage bonds earlier this year to about four cents on the dollar less than debt with comparable coupons.
PennyMac Mortgage Investment Trust (PMT) said last month that it sold only $170 million of $550.5 million of jumbo-mortgage bonds it created in September, describing the retention of senior classes as an “opportunistic investment.”
Sales peaked at about $1.2 trillion in each of 2005 and 2006, before halting five years ago as the debt fueled a global financial crisis amid tumbling home values and soaring defaults.
Jumbo mortgages are those larger than allowed in government-supported programs, currently as much as $729,750 for single-family properties in high-cost areas. For Fannie Mae and Freddie Mac loans with the lowest costs for most borrowers, limits range from $417,000 to $625,500.
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