"We believe that as a knock-on consequence of housing prices dropping and the imposition of extra fees and more constrained underwritings of mortgages in the prime mortgage sector, that the response on average of mortgagors to a rate incentive for refinancing is going to be substantially lower than it has been in the past," Don Brownstein, SPM’s CEO and chief investment officer, told FINalternatives. "So we think there is money to be made by effectively taking positions which reflect that view about prepayments."Executives at the firm did not immediately respond to a request for comment, but sources have suggested to Housing Wire that the hedge fund is likely looking to invest in so-called interest-only strips -- known more commonly as IO strips -- in the mortgage-backed securities market. IO strips can be among the riskiest MBS investments due to an extreme sensitivity to prepayments; nonetheless, slowing prepayment speeds sustained over a period of time would make such investments extremely profitable, HW's sources explained.
New Hedge Fund Looks to Take Advantage of Slowing Prepayments
While a number of hedge funds are looking to jump into non-performing residential mortgages, others are looking for opportunities of a different kind within the larger mortgage market. One case in point is Stamford, Conn.-based Structured Portfolio Management, which manages roughly $1.2 billion in investor assets; the firm is betting that slowing prepayment speeds represent at least an intermediate-term trend, and has launched a new hedge fund designed to profit from it. FINalternatives reported on the move by SPM earlier on Tuesday morning: