Private equity and insurance companies piling into residential mortgages

After two years of limited demand, private equity and insurance companies are increasing their allocations to single family residential mortgages. This increased flow of funds appears to be driven by strengthening macro factors that favor residential mortgages over other yield assets such as commercial real estate (CRE) and commercial (C&I) loans. These strong fund flows are resulting in tighter credit spreads, higher prices, and an increased focus on sourcing new originations.

Mortgage investors are pointing to several factors leading to increased demand for mortgages in the current environment, including: the end of the current rate-hike cycle, government subsidies for borrowers, favorable capital treatment by financial regulators, higher liquidity and finance-ability for mortgage assets, and superior risk-adjusted returns in a market where mortgage investors can find low LTV loans that carry yields 2.0-4.0% over SOFR.

This increased demand is resulting in tighter credit spreads for private label, non-QM RMBS securitizations; increased prices for a broad range of mortgage loans including seconds, home equity agreements, bridge loans, and alternative documentation loans; and strategic transactions between investors and originators.

Federal Support and Market Stability

As the Federal Reserve concludes its recent rate-hiking cycle and adopts a “higher for longer” stance, residential mortgages are emerging as superior risk-adjusted assets. This market stability is compelling several long-term investors, including banks and insurance companies, to increase their mortgage allocations as they reduce allocations to commercial real estate and business lending.

The federal subsidies for American consumers – including through student debt forgiveness and recent proposals to subsidize monthly mortgage payments – appear to be providing significant credit enhancement for mortgage loans. Homeowners benefiting from these subsidies are more capable of meeting their payment obligations, thus reducing the credit risk for lenders. Moreover, the prolonged high-interest-rate environment is leading to lower refinancing rates, which extends the duration of cash flows that investors can expect from these assets. With the Federal Reserve likely to lower rates in the future, the value of these extended cash flows is anticipated to rise, making long-term investments in residential mortgages even more appealing.

Regulatory and Comparative Advantages

Single-family residential loans are receiving attractive treatment under banking and insurance regulations, including new accounting policies relating to risk-based capital charges.

As residential loans are receiving more attractive risk-based capital charges than other categories of loans – such as CRE – insurance companies and banking are realizing that residential mortgages are a more efficient capital allocation compared to other asset classes. This is resulting in new balance sheet strategies for institutional investors.

The current stress in the CRE and C&I loan markets further highlights the advantages of residential mortgages. CRE loans, which face higher risk ratings and lack government support, present a higher risk for a similar yield compared to SFR mortgages. C&I loans are also under pressure due to potential increases in unemployment and reduced corporate profitability as the Federal Reserve combats inflation. These loans often require higher capital reserves, making residential mortgages more attractive by comparison.

Liquidity and Financing Innovations

In an era where liquidity is paramount, residential single-family rental (SFR) mortgages are demonstrating superior liquidity within a +$4 trillion market. With the recent liquidity runs experienced by several banks, Banks and insurance companies are particularly interested in the attractive liquidity characteristics of newly originated, adjustable-rate mortgages. Institutions can finance their SFR mortgage loans through the Federal Home Loan Banks (FHLB) system and major money center banks, further enhancing their liquidity positions.

While traditionally residential mortgages have historically been available for direct investment only by larger institutions with full servicing capabilities, market innovations are making it easier for community and regional banks and smaller institutional investors to access residential mortgages. For instance, The Change Company, the country’s largest non-qualified mortgage (non-QM) originator, offers its mortgage production for sale directly to banks and smaller institutions through its online portal, xChange ( This platform enables over 400 financial institutions to browse and purchase loans in single loan transactions or by selecting individual loans to place into a small portfolio for purchase. xChange offers to service these loans and provide the investors a low-cost way to invest in residential mortgage loans. Eliminating barriers to entry for investors who lack the resources to establish a full capital markets desk is drawing new investors and additional capital into the market.

Key Takeaways

The convergence of federal support, favorable regulatory treatment, and current market dynamics is resulting in a strong flow of funds into residential mortgages. This increased interest is being led by private equity investors and insurance companies. There are also early signs suggesting that banks and credit unions are increasingly allocating capital to residential mortgages and away from CRE, credit card, auto, and commercial loans.

Many investors appear to believe the mortgage market currently presents a unique opportunity to capitalize on low risk-based capital charges, attractive yields, extended cash flows, and enhanced liquidity. As other traditional loan products like CRE and C&I loans face increased risks and regulatory burdens, the strategic shift towards residential mortgages is resulting in increased demand and more attractive pricing for non-QM mortgages.

In this evolving market landscape, residential mortgages are increasingly becoming a strategic imperative for several growth-oriented institutions aiming to optimize their portfolios and navigate the complexities of the current economic environment. With innovative marketplace platforms like xChange facilitating easier access to these assets, residential mortgages are becoming more accessible and attractive now to a broader range of investors.

Previous post
Next post

CDFI Fact Sheet

Comments to Proposed CDFI Fund Rule

Fortune's 2021 Change the World List

Racism And The Economy

2021 CDFI Survey Key Findings

Closing the Racial Inequality Gaps