Amherst: RMBS cheapest since 2008
A few months ago Amherst Securities Group attributed the reluctance of investors to enter the non-agency residential mortgage backed securities market as a flight-from-risk reaction. And while other structured finance products recovered over the past few weeks, non-agency RMBS have not, leading Amherst to revise its conclusion. The mortgage research firm now says that investors refrain from buying non-agency RMBS because they are concerned that prices could drop lower, full bid/full ask spreads are too wide, elevated price volatility and/or the trickiness of hedging non-agency MBS. However, Amherst views non-agency RMBS as cheap compared to other products as it has at any point since 2008. "While prices are likely to remain volatile and could decline in the near-term, the medium-term outlook for this market is very favorable versus other products; this is a good time to begin to scale into this market," the firm stated in a report released Monday. Some REITs are ahead of Amherst in that they are already boosting their exposure to the downtrodden sector. Two Harbors Investment (TWO) said in May it was partnering with Barclays Capital (BCS) to issue an RMBS worth $250 million. Two Harbors has added private-label RMBS at the expense of government-backed mortgage bonds. Starwood Property Trust (STWD), in addition to looking for investments in commercial real estate markets, is turning up its bets on RMBS as it seeks alternatives to cash left idle by slow lending in its traditional commercial property space. Starwood last quarter bought $94.5 million in RMBS with a $157.4 million face value, boosting its portfolio to $241.5 million in face value, it said in its earnings statement. "The RMBS markets are a bigger mess than the (commercial mortgage-backed securities) markets, and are offering extremely attractive returns right now," Boyd Fellows, president of Starwood, said on the conference call, according to a transcript. RMBS and collateralized debt obligations currently account for 91% of expected total losses on structured financial products. To date, Fitch anticipates U.S. RMBS losses will reach 12% of the original balance of the loans, while CDO losses are expected to grow to 43% of the segment's original balance. Amherst said it couldn't pick the best entry point for the non-agency RMBS sector, but that it sees the sector as an attractive entry point to selectively scale into purchases in this market. "We strongly believe mortgages are likely to outperform other products in the medium-term," the company stated in the report. Write to Justin T. Hilley. Follow him on Twitter @JustinHilley.