To the founding partner at Gryphon Capital Income Trust, Ashley Burtenshaw, investing in residential mortgage-backed securities (RMBS) can be a good way to diversify a portfolio, even if many investors don’t know it.
Speaking to Nest Egg, he explained that RMBS are the result of banks, rather than funding a loan from its own balance sheet, transferring that loan to a trust which in turn allows the capital market to fund it, and other loans issued by the lender, by purchasing the individual securities.
What should investors look for when considering investing?
Investors should keep an eye on four key things, Mr Burtenshaw told Nest Egg:
1. What’s the loan to value ratio (LVR)?
Make sure that it's quite a low LVR, because the higher LVR the more exposure you have to house prices. So, have a conservative LVR, call it 60 per cent or 65 per cent.
2. Check out the lender’s borrowing requirements
Secondly, make sure that the underlying loans [in the RMBS] have had a sufficient payment history.
What we mean by that is how long these borrowers have been paying for and look to make sure that it's got two, three, four years of payment history before you invest.
You don't want to be heavily concentrated to non-metro, which has a high percentage of single industry towns.
You want to make sure you don't have a lot of concentration to first home buyers because it's a perception that they haven't entered into this market and they don't understand the obligations about paying mortgages so they might experience higher probabilities of going into arrears.
You want to be highly diversified across the country and across industries. We don't want to be heavily concentrated to any one borrower type or any large loan borrower because they have the propensity in periods of stress to suffer big losses.
4. Keep an eye on buyers entering the market later in life
Being a perpetual renter, then suddenly an owner – the way that we look at those types of borrowers is again to think about payment history.
We like to see a long payment history before we invest because the path of a loan that's had only one, two or three months of payment history, the path of that loan in terms of performance is a lot more unpredictable.