BlackRock structured debt team, avoiding pitfalls of securitization, dives into loan management

21 September 2018
 
BlackRock is expanding responsibilities of its securitized debt group to oversee potentially enormous amounts of consumer and real estate loans for big investors looking to improve on returns and quality available in bonds, according to one of the company’s top money managers.

The manager of USD 1.85tn in fixed-income has just begun running loan portfolios assembled as alternatives to private-label bonds, including the kinds that stung investors badly in the past, said Randy Robertson, BlackRock’s head of structured products. It launched the effort in 2Q18 with a second-lien residential loan trade, but the platform is set up to handle all assets that might otherwise be securitized, such as commercial real estate mortgages, auto and student loans, he said. The target investment size: USD 500m and up.

Once an investor is on board, the team aggregates loans directly from originators and oversees servicing and any loss mitigation needs, Robertson said. BlackRock’s RMBS, ABS and CMBS securities desks were “repositioned” to work on the initiative, along with specialists hired for the venture, he said.

He declined to name originators that will provide loans for the platform, citing non-disclosure agreements.

Robertson came up with the program to address the shortcomings of securitizations that remain unnecessarily risky after wreaking havoc with the financial system a decade ago. Advantages over bonds are that investors get a say in loan selection, control over the due diligence and servicing, and the ability to create customized structures, he said.

“These are criteria that legacy RMBS securities have proven average, at best, at controlling,” said Robertson.

Sky’s the limit

Investors include insurance companies, mutual funds, hedge funds and even distressed funds, he said. The platform is “completely scalable,” so the sky’s the limit on its AUM, he said.

The move is further evidence that investors are turning to whole loans for peace of mind or simply access to higher-yield opportunities. Many mortgage REITs and private equity firms have favored loans over bonds for years. BlackRock sees its program as solving problems that have prevented others from participating: they lack the infrastructure necessary to source and choose the best assets, oversee servicers and monitor performance.

MetLife, which after the financial crisis began assembling a USD 13bn residential loan portfolio of its own, also manages the debt on behalf of other investors, as reported. Like Robertson, MetLife global structured products chief Nancy Mueller Handal has expressed scorn for mortgage securitizations where issuers haven’t gone far enough to address governance issues that can leave investors powerless to identify and rectify faulty loans or deals.

BlackRock’s strategy was likely informed by its ongoing effort to extract its pound of flesh from issuers, servicers and trustees central to the mortgage crisis.

Together with large investors including MetLife, Pimco and TCW, BlackRock helped lead the charge against Countrywide Financial and JPMorgan Chase, which agreed to cough up USD 13bn for bondholders. BlackRock and some of the same investors are now challenging the trustees of hundreds of bond deals, claiming that those banks failed to take action against lenders and issuers even when violations were known, as they were allegedly obligated to do.

To be sure, risks associated with servicers, due diligence providers and other players operating with a degree of autonomy can still affect the loans. BlackRock asserted that risks for investors in its loan program are no greater than in bonds, in terms of the assets or liquidity.

Lax governance

Meantime, the non-agency residential bond market is staging a comeback, of sorts. Issuance of non-agency RMBS and credit-risk transfer securities has topped USD 33bn this year, the most for residential credit assets since the financial crisis, according to Kroll Bond Rating Agency. Kroll expects USD 47.5bn for the full year.

Conventional wisdom puts loan quality far above boom-era non-agency loans, but credit rating analysts routinely chide issuers on deal governance. For example, in a recent Neuberger Berman bond backed by alternative documentation home loans, Kroll warned that faults in delinquent loans may escape detection and of a provision that lets Neuberger off the hook for representations and warranties well before the mortgages are retired, according to the ratings presale for the deal, HOF 2018-1.

“Investors in recent expanded credit RMBS deals have nowhere near the same breach enforcement rights and protections as whole loan investors,” said Eric Kaplan, director of the Milken Institute’s Center for Financial Markets’ housing finance program.
 
by Al Yoon