New York Life Investment Management has announced plans to purchase a majority interest in Verus Mortgage Capital's corporate parent as the market enters the kind of interest rate environment where mortgages look more attractive to insurers.

Financial terms of the transaction, which is set to close in the first quarter of next year, were not disclosed.

NYLIM, which had approximately $837.6 billion in assets under management as of June 30 and has been ranked as a top 30 money manager, has agreed to make a multiyear investment in the company.

Interest in gaining access to Verus' production and secondary market operations for loans made outside standard qualified mortgage parameters was a key motivator in the deal, according to NYLIM.

"Invictus has built a differentiated residential credit platform combining deep investment expertise with scaled proprietary sourcing and securitization capabilities," CEO Naïm Abou-Jaoudé said in a press release. "These are difficult capabilities to replicate and highly complementary to New York Life's permanent capital and NYLIM's institutional franchise."

Access to the non-QM market

The purchase of Invictus, a single-family credit manager that has more than $20 billion in gross assets under management, arrives in a higher rate environment that has encouraged insurer involvement in the growing non-QM market. 

"We see significant opportunity in a growing U.S. single-family residential credit market, where strong fundamentals and structure inefficiencies continue to create attractive investment opportunities," Invictus Capital Partners CEO Michael Warden said in a press release.

Some players in the non-QM market were saying even in August that rates were attractive to insurers that use the cash-flows from home loans to match their liabilities, and the latest jump has likely built on that.

"You have a whole addition of insurance companies stepping in at these higher rates," Sreeni Prabhu, president and CEO at Angel Oak Mortgage said during an earnings call last month.

When rates rise so too do the potential yields from non-QM loans that borrowers typically pay a higher premium for due to their relatively more complex underwriting.

Insurers typically watch that underwriting carefully, as do their regulators, in ways that are making securitization more attractive.

The National Association of Insurance Commissioners has viewed single-family non-QM as relatively less risky than commercial assets, but it has considered treating aspects of it more cautiously in a recent proposal. 

Invictus has acquired over $48 billion in residential loans and completed more than 90 securitizations.

While non-QM issuance has been growing quickly, the supply of non-QM loans from private programs is relatively small compared to the larger single-family securitization market dominated by government-related entities. With rates higher, pressure on supply and underwriting could grow in ways more important to manage.

Verus, which operates wholesale and correspondent non-QM loan channels, said it manages underwriting risk by ensuring borrowers have credit, assets and income requirements that it verifies, documents and checks with quality control measures.

The company also recently replaced a legacy loan origination system with a new one from Vesta with newer artificial intelligence-driven workflow capabilities. The switch could help  produce efficiencies that become increasingly important in a high-rate environment.