Insurers Tied to Apollo, KKR Buy Mortgages Outright in New Twist

Yield-hungry insurance firms are adopting an unconventional strategy: they’re skipping mortgage-backed bonds and buying the underlying whole loans outright.

It’s a trend that’s picked up pace over the last few years. Last year alone, insurers increased their holdings of residential mortgage loans by a whopping 45%, or about $20 billion, according to an analysis by Ellington Management Group.

The loans typically don’t qualify for being bundled into bonds supported by Fannie Mae or Freddie Mac — government-backed companies that guarantee most US mortgages for investors. The borrowers are usually riskier, and investors owning mortgages directly, rather than slices of mortgage-backed bonds, means firms have to deal with arduous tasks often left to specialists. Not every firm has the size or sophistication to do that, which is why large alternative asset managers like Apollo Global Management Inc. and KKR & Co. are leading the shift.

So why bother with the hassle of owning these loans directly, rather than in securitized form? Better yields. It’s difficult to quantify exactly, but insurers with the capability to own mortgages directly could save some 35-45 basis points on the cost of securitization itself, and that’s without considering the substantial amount of capital freed up on insurance company balance sheets because of the better risk treatment, according to Ryan Singer, head of global residential investments at Balbec Capital.