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May 29, 2020  

Liberty Mutual Propping Up Non-QM Flow

Liberty Mutual has suddenly emerged as perhaps the most influential buyer of home-loan bonds whose underlying receivables don’t meet the Consumer Financial Protection Bureau’s “qualified-mortgage” guidelines.

Pointing to a spate of senior securities it has purchased over the past two weeks, sources said Liberty Mutual has played a pivotal role in helping issuers including Angel Oak and Invictus Capital complete their first deals since the onset of the coronavirus crisis. At the same time, however, questions are arising about whether today’s dealflow is too reliant on the Boston insurer.

Just a month ago, dire economic conditions and sky-high funding costs were prompting predictions that the market for non-qualified mortgage securities might be in for a prolonged freeze. After all, no new deals had taken place in the asset class since late February and none were in the immediate pipeline.

So when the issuers abruptly began to reappear earlier this month, industry participants were naturally skeptical of their prospects. As it turns out, some had pre-placed their senior bonds with Liberty Mutual, and at far tighter spreads than they might have paid a few weeks earlier.

Take a $303.7 million issue Angel Oak priced on May 21 with Nomura running the books. Sources said Liberty Mutual bought just about all of a $207.5 million class of triple-A-rated securities with 2.1-year lives, accepting a spread of 220 bp over swaps. A month ago, comparable bonds were trading on the secondary market at an average of 500 bp over swaps. But before the crisis, they were selling at 175 bp, suggesting that Liberty Mutual still might see them as a source of outsized yields.

Liberty noted in its first-quarter financial statement that it had commitments to buy $1.3 billion of mortgage bonds on March 31, which also could indicate it was making good on purchase agreements struck before the crisis.

No matter the motivation, industry professionals are expressing concerns that Liberty Mutual’s appetite for senior non-qualified mortgage bonds may be making market conditions look better than they really are. If additional buyers remain on the sidelines, they argue, then a lasting recovery can’t take place. “It bodes well if it is the start of something, but right now it’s only Liberty buying,” one underwriter said.

Indeed, investors remain broadly concerned about the abilities of mortgage borrowers to keep up on their payments as the economy slows or resume installments after entering forbearance. Rating-agency documents for all of the recent offerings have noted that the deals’ asset pools contain significant numbers of accounts in forbearance.

Nonetheless, supply continues to flow at least for the time being. Invictus’ $361.9 million transaction priced May 22 with Barclays and Credit Suisse running the books. Neuberger Berman and Starwood Capital also were in the market. And there has been talk that Citadel will float its debut issue in the coming weeks.

“In a surprise to our prior views, the primary market in non-QM backed MBS is showing more signs of life than we previously expected,” Bank of America researcher Chris Flanagan wrote in a May 22 report.

While Liberty Mutual currently is playing an uncharacteristically major role as a mortgage-bond buyer, it’s no stranger to the sector. It was holding $7 billion of home-loan securities on March 31, up from $6.2 billion at yearend 2019.

In addition to insurers, major buyers of non-qualified mortgage paper include fund operators and banks.