Don’t fear mortgage-related assets

May 5, 2016 | Last updated on May 5, 2016
3 min read

When considering investing in real estate or mortgage assets, many people worry about a repeat of the recent financial crisis.

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But when assessing mortgage products, you have to discern between non-guaranteed mortgages and government-guaranteed mortgages, says Jeffrey Gundlach, CEO of DoubleLine Capital in Los Angeles, California, and manager of the Renaissance Flexible Yield Fund.

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Non-guaranteed mortgages are the type of assets that “had trouble during the crisis, [since] the financial community broadly misunderstood just how high the default rates could be on those products,” he adds.

Instead, Gundlach and his firm chose government-guaranteed mortgages in the 2007 to 2009 period—with these assets, the government protects lenders from defaults and that allows lenders to more easily offer low rates to borrowers. As a result, the firm generated positive returns in their mortgage-backed securities portfolio during that time.

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To worry about the 2008-2009 crisis reoccurring is to fight the previous war, he explains, especially since “the underwriting standards then were very different and very much worse than the standards of the past few years. In 2004 through 2007, underwriting was very loose, meaning just about anyone could get a mortgage—even if [they’d] had a car repossessed or were late on paying two or three credit cards.”

So, “[People] were still able to get a mortgage and pay a very low interest rate. [That led to] these homeowners speculating on the housing market, even if [they] had very poor credit histories.”

Read: House hunters fear being priced out of the market: survey

The environment today is very different, says Gundlach. “In more recent years, it’s become very difficult to obtain a mortgage. You have to have pristine credit history and scores that are very high, and no history of problems with credit cards or auto loans. You also have to prove income and put down large down payments.”

In fact, “Most loans that are securitized [these days] have 30% or 40% down payments. So, the homeowner defaulting would be [unlikely], given how much money they have at stake.”

Read: Big mortgages pushing up average household debt

So, what are the risks today?

The main thing that’s troubling financial and credit markets is deflation, represented by falling commodity prices. But this is positively impacting mortgage-related assets, says Gundlach, because, “when you think about mortgages being paid back, lower energy prices make that more likely. If the homeowner is paying less for energy, they have more money to make mortgage payments.”

Read: Pay mortgage or save? Help young homebuyers decide

If anything, investors should consider that “there could instead be a significant default cycle in the corporate economy.” A default in this area would be related to the performance and fundamentals of corporate borrowers, and to how these borrowers are handling credit risks.

Read: Choose corporate bonds to boost yields

In terms of portfolio exposure, Gundlach says, “We currently have a little a bit of Canadian exposure. We had nothing but U.S.-dollar exposure from 2011 to late 2015. But in January 2016, we felt the U.S. dollar had finished its appreciation for the time being. So we included other exposures.”

Read: Dips ahead for loonie and USD

Going global has been a benefit, he adds, because the U.S. dollar has been weak this year and, against many people’s predictions, “The [loonie] has appreciated versus the U.S. dollar more than most people thought it could.”

He doesn’t have a lot of non-U.S. exposure, he notes. But, as of April 2016, he’d added to this area of his portfolio twice this year.


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