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February 21, 2020  

Pensions Bullish on Reverse-Mortgage Bonds

Pension systems are emerging as heavier buyers of reverse-mortgage bonds.

The orders began to flow about a month ago, with money managers including BlackRock, Fidelity Investments, State Street and Vanguard Group overseeing the investments on behalf of corporate retirement plans, including some that were new to reverse-mortgage securities.

The influx of demand doesn’t appear to be over, as a number of corporate pension systems still are exploring moves into the sector. What’s more, several large public pension systems including Calpers and New York Common Fund are taking a hard look at building out their exposures or creating new ones.

While corporate pension systems often farm out management of their holdings, many public retirement organizations assign internal personnel to run their asset-backed bond portfolios. “A lot of public plans are taking notice of the reverse-mortgage sector and taking a look for themselves,” one source said.

The added interest already has seen the universe of active bidders for reverse-mortgage bonds grow to about 35 institutions from perhaps 10 at yearend 2019. Also in the mix are insurers and hedge fund operators. But they aren’t building up their portfolios as aggressively, in part because they prefer longer-dated positions than typically are available in the sector.

The pension systems’ recent deployments, meanwhile, coincide with the opening of their 2020 budgets — with the capital coming from allocations that they otherwise might have funneled into more mainstream mortgage securities. They are looking at reverse-mortgage bonds in particular as a source of higher-returning housing exposures, with triple-A-rated bonds with one-year lives in the sector recently selling at an average yield of 3.2%.

Comparable bonds backed by home loans that fall outside the Consumer Financial Protection Bureau’s “qualified-mortgage” guidelines, by comparison, are yielding 2.4%. Securities underpinned by qualified jumbo accounts are returning a paltry 1.5%.

The volume of new reverse-mortgage deals is expected to rise in 2020, with industry participants estimating a full-year count of perhaps $4 billion amid indications from issuers including Finance of America, Nationstar Mortgage and Waterfall Asset Management that they plan to tap the market more often. The sector produced 12 transactions totaling $3.7 billion in 2019, versus nine offerings for $3 billion in 2018, according to Asset-Backed Alert’s ABS Database.