Residential mortgage-backed security

Mike is the Chief Executive Officer for Ellington Management Group, a firm he founded all the way back in 1994, after a little over a decade with Kitter Peabody.

including as the Senior Managing Director in charge of RMBS.

Ellington has a little over $20 billion in AUM, I believe, across its different investment strategies.

We'll get into all of that.

And also when you're dealing with these issuers, they're not able to take deposits or probably won't be able to issue cover bonds.

So really, RMBS is their sort of bread and butter when it comes to funding.

So Yeah, if you look at just that calculation on their side, I mean, I'm sure the sort of repricing, I'm sure all the syndicates will have said to them, you know, you may have been able to price your seniors ideal in the kind of mid to low 70s a year ago.

But it's just the case now that the market shifted and it's probably going to be more like the mid to low 80s currently.

And clearly that hasn't discouraged them.

We've had plenty of supply from like Lendinvest, Enro and Lenco since the market reopened.

But yeah, the other question is, you know, obviously, you look at Prime RMBS, you're probably just going to be issuing a senior tranche.

So you're going to be feeling that repricing a lot more because there's no sort of tighter mesnotes to compensate for that.

To help unpack the topic, I'm joined by two guests with deep expertise in this space.

Firstly, Rihanna Smeja, senior vice president and sector lead in our European RMBS ratings team, who has been closely involved in analyzing these Sharia-compliant home financing asset structures.

And joining us externally is Saqib Zaman, co-founder and the CEO of StrideUp, one of the leading providers of Islamic home finance in the UK, and the originator behind one of the most recent scotization-backed Sharia-compliant home purchase plan programs.

So together, we'll discuss the current market landscape, how Islamic home finance differs from conventional mortgages, what happens when these assets are put into a scotization form, and whether this niche segment could become a more meaningful part of the European residential securities market in the years ahead.

the home purchase plan is senior secured against residential property.

So from a risk and reward perspective, this is obviously an asset that despite the structural difference, investors are comfortable with.

And that's why we decided to explore an RMBS transaction.

But given StrideUp's position in the market and its status as effectively requiring Sharia compliant funding as well.

But the data lines up with another major trend, rapid growth in the capital markets supporting second lien lending.

New research from Kroll Bond Rating Agency found that second lien RMBS Outstanding has grown from just $375 million across four deals in April 2023 to to $34.2 billion across 140 deals by July 2026.

That includes both HELOCs and closed end-to-second mortgages.

KBRA now considers second lien securitization a reoccurring part of the private label RMBS market after years of relatively limited activity.

So from both the consumer demand side and the capital markets side, there's more evidence building around the broader home equity shift.

The reverse mortgage market itself is also continuing to broaden.

So on a percent basis, it's a drop in the proverbial bucket, right? So there is a little bit more issuance in scared ice products.

If you look at non-agency RMBS, That's been going up just as, again, we're still kind of expanding that market from way back in the GFC.

And as house prices continue to go up, obviously the debt backing those are going to go up.

But the CMBS market, commercial real estate, and the asset-backed market growing very slowly.

Investment opportunities is quite broad.

And so there are the public markets and a lot of this credit is coming into the public markets, whether it's high yield bonds or broadly syndicated loans, whether it's in the developed markets or the developing markets, or whether it's coming through structured credit being in the CMBS market or the ABS market, or the other parts of the structure market, which forms the CLO market and all the tranches there and the RMBS market.

So, we see continued growth in structure finance, which is a $4 trillion market today when we talk about liquid public structure finance.

High-yield bonds and loans, US and Europe, nearly $4 trillion.

They're pretty trusted by investors.

I think the Newcastle Building Society has put a UK Prime RMBS on screens and I think that's only its second deal.

But I think the debut went very well.

So it's pretty much just all the experienced issuers going out for the start.

And then for your weekly article this week, for your cover story, you've decided to look at the...

Will you tell me what did you choose to focus on and why this week?

Yeah, so I decided to do a story on the Dutch Prime RMBS market.

It was basically, it came down to, you know, Lloyd's announced a deal last week and they priced it this week as we record on Friday and it went really well.

The NAIC has indicated an interest in doing a similar exercise for ABS securities coming up, and they'll probably do it over different asset classes.

So RMBS, you know, residential mortgage backed securities or consumer backed or auto backed.

They're going to do a similar exercise.

They actually had an announcement just today that they may accelerate a review of multi-asset class credit securitizations.

And they wanted someone to kind of build a real estate equity business for them.

They were debt guys, and they were doing CMBS and RMBS.

So, did that for a few years.

And then, the BRICS got really popular.