Alternative asset manager Canyon Partners is committing $250 million to buy new mortgage bonds created by A&D Mortgage LLC, a partnership that will help the mortgage finance company substantially increase the pace of its bond sales.
Canyon will buy the riskiest slices of residential mortgage-backed bonds ineligible for guarantees from Fannie Mae and Freddie Mac, enabling A&D to create some $5 billion of the deals known as non-qualified securitizations, according to a statement.
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"Our partnership will allow us to substantially increase securitization issuance in the years to come, perhaps by up to two or three times," said Max Slyusarchuk, A&D's founder and chief executive officer.
The agreement comes as the market for securitizations of non-qualified mortgages is growing fast, thanks to the extra yield investors earn on the deals and significant demand from insurance companies. Total annual creation of bonds like this is on track to reach a record $50 billion by the end of this year, up more than 10% from last year, Bank of America strategists estimated in June.
A&D focuses on originating and then servicing residential mortgages for borrowers around the country. After the loans are made, they're put into securitizations and sold to bond investors.
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The firm typically keeps the riskiest portions of its deals, called the equity, as well as some of the lower-ranking portions. Selling some of the securities to a third party will free up more of the company's cash to invest in making new home loans, according to Slyusarchuk.
From Canyon's point of view, deploying more cash into the equity of the bonds will help the money manager grow its investments in an asset class that should enjoy strong tailwinds from consumer demand for housing, according to Adam Rizkalla, a managing director focused on asset-based financing at Canyon.
Non-qualified mortgage securitizations generally include many home loans used by investors to finance rental properties, for which there's ample demand because of the housing shortage and high mortgage rates, he said.
"We've been growing our exposure to mortgage credit, and this partnership gives us more access to high quality mortgages," Rizkalla said in an interview.
