In the private credit market, conditions are right for insurance companies to begin nabbing a bigger share of whole loans in the asset-backed finance space, according to a panel of experts.
Fueled by a variety of factors, interest from the insurance sector is growing for bespoke whole-loan issuances offered
"It's evolved at this point with insurance company investors in particular," she said at a Housing Finance Strategies conference on Tuesday.
"People are looking for access to those same types of collateral and the same kind of structures that are in public ABS and then sort of repackaging them into ABF in many ways, for access," she added.
In explaining the differences between ABF and ABS, Satish Mansukhani,
"The public ABS sector is suited to the larger volumes of more homogeneous and granular assets that fit into a static pool. ABF, on the other hand, is better suited to bespoke assets that acquire more tailoring to issuers and investors," he continued.
While ABS is prevalent, its popularity means offerings are commonly oversubscribed, nudging private market investors toward asset-backed finance in hopes of higher returns and access.
"I get a lot of questions on 'I love the credit. I can't get enough of it,'" Handal said. "We get the question of how can we take the whole deal so that we can create a fully funded deal that is an ABF private deal, but it's not widely distributed, so you actually get access to it."
Investments in residential loans available through ABF may offer insurance companies an opportunity to diversify beyond commercial real estate or corporate credit they likely already hold on their balance sheets, Handal added. The companies have shown particular interest in the non-QM space, including in investor and debt service coverage ratio loans.
With approximately 300 insurance companies in the U.S., only a small percentage are currently active in asset-backed finance. At the same time, the volume of residential whole loans has more than doubled to $93 billion and make it a scalable asset class, according to Mansukhani.
"I think there's huge opportunity for the insurance companies that own a few hundred billion dollars in securities and residential mortgage securities to rotate to increase their allocations," he said.
The growing interest in ABF comes as changes in the mortgage market since the Great Financial Crisis have made such investment opportunities attractive. The share of nonbank originations steadily expanded and considerably outpace volumes from depository institutions today in the past 15 years.
"I think it's been a very accretive capital partnership between private credit and direct originators, which has helped smooth the transition of a massive shift," said Brooke Carillo, chief financial officer
"On the insurance company side, not only are there more buyers looking to buy directly from originators, but also operational savviness," Carillo added.
"There's a lot more flexibility that the nonbank or private sector has created in the terms of securities or term financing."
Also in insurance company's favor is that their capital framework also is more friendly towards residential whole loans compared to other types of consumer loans, Handal said.
Elsewhere during the session, panelists detailed the important impact artificial intelligence was having on work done in the secondary market and investment space.
"It's really machine learning and using that technology to help you quickly identify key variables, rank, order, tree-based risk models. Do all the things that we've done, but just much more efficiently and with some more bells and whistles," Handal said.
"We're looking at all of that to understand — better forecasting techniques, better modeling techniques," added Mansukhani.
