Arguably among mortgage investment prospects that could become more compelling with risk retention requirements moving forward are the real estate investment trusts.
When asked about this at a recent CoreLogic conference in New York, CoreLogic senior vice president David Hurt said he is among those who see REITs as they currently stand as naturals when it comes to coping with new risk retention rules.
“They’ve never been uncomfortable taking credit positions,” he said in an interview with NMN, noting that there are parallels between the new requirements and the fact that REITs pay out 95% of their profits while there is “5% that is always retained by them.”
“That is why I say if there’s a 5% vertical slice across the transaction [in risk retention rules] there is not a lot of discomfort [for REITs]. In their mission of being good credit managers, they are comfortable holding that 5%, maybe even more.
“That’s what their whole makeup is all about.”
Real estate investment trusts as a group and over time have had a mixed track record with investors.
So, as Hurt puts it, “if you’re going to be a mortgage REIT, it’s really going to be predicated on the performance of the borrower so you really have to do a very good job as a credit manager.”
When asked if there are possible other regulatory changes ahead for the real estate investment trusts to consider as well, Hurt said it is certainly “possible.”
“Some could make an argument, just an observation more than anything else, that they would qualify as a financial services company,” he said.
When asked about the potential for REITs to play more in the origination space to control their credit risk, Hurt said this is a possibility not only for a REIT but for a private equity group that thinks, “Hey, what are the two words that come up [in today’s market], 'control’ and 'transparency?’ So how do I get my hands on control?”
This may be more likely to lead such players to third-party originator strategies than retail origination.
With a retail channel, “you have...head count [and] all those things associated with primary side of the market,” Hurt noted. As an alternative, there are “different models that can be leveraged,” he said.
Mortgage brokers might not find much opportunity here but correspondents that sell closed loans, particularly if they service them, might.
“You might, just as an example, say 'well, I only want correspondents, five, a half dozen...very much like the old insurance company models...
“[They] didn’t want structure on the front end and were very prudent in the underwriting of the collateral.”
These players “had [an] exclusive network, let’s call it, of a few geographically desirable correspondents that would send them assets [as they still do] on the commercial side today...
“I could see that happening as well on the REIT side,” he said, noting that the purchases would be “very selective.”
