“We have been pursuing legislation that would make STACR [Structured Agency Credit Risk] and CAS [Connecticut Avenue Securities] good REIT assets,” Joe Prendergast, principal financial risk analyst at FHFA told delegates at ABS East during a panel on day two of the conference.
There are regulatory obstacles that prevent REITs from fully participating in the CRT sector, limiting how much of the bonds they are able to hold. REITs are limited to only buying a small amount of CRT paper due to investment limits on credit linked products. GlobalCapital understands that there is significant demand among mortgage REITs for CRT bonds, but regulation is hampering opportunity.
This demand was made evident on September 13 when Gary Kain, CEO of mortgage REIT American Capital, told attendees at the Barclays Global Financial Services Conference that his firm was altering its investment strategy to allow for investments in CRT bonds.
Speaking on Monday’s panel, Laurel Davis, vice president for credit risk transfer at Fannie Mae, said that allowing REITs to invest more capital into CRT deals was a “high priority” for the GSEs.
“We think that they [REITs] are natural money to come into this sector,” Davis added.
While there is demand from the GSEs and REITs to get the investment rules changed, inactivity in Washington is likely to make that process more difficult.
Washington sources say that there is little impetus in Congress to pass a bill allowing mortgage REITs to invest in CRTs, and given that Congress is now gearing up for election season, any such provision would have to be passed in a lame duck Congress. There are a number of issues for the post-election Congress to consider, making this particular piece of housing finance reform unlikely, according to sources.
The CRT market still maintains a deep investor base, despite no immediate change to the REIT issue. Davis noted during the panel that 150 unique investors have participated in Fannie Mae’s CAS program, with asset managers making up the largest percentage of the buyer pool.
Kevin Palmer, senior vice president of credit risk transfer at Freddie Mac, added that the agency’s STACR program had a buyer base of 200 unique investors.
Davis said that Fannie Mae was seeing a large number of hedge funds looking to invest at the bottom of the stack, but that these investors were acting more like buy-and-hold accounts rather than “fast money” buyers.
“A lot of times hedge funds get tired of being fast money, and what we have seen in our program is that a lot of the hedge funds do act a lot more like real money,” said Davis.
Demand for the asset class remains high, going into the final stretch of the year. The most recent CRT deal, Freddie Mac’s STACR HQA 2016-3, was priced at record tight spreads for the top of the capital stack, at 80bp over Libor for senior M-1 class.