DoubleLine Capital is embarking on a plan to originate and securitize mortgages, seeking to fill a niche that has traditionally belonged to banks and brokerage firms.
The Los Angeles-based money manager, headed by Jeffrey Gundlach, is starting an investment advisor called Mortgage Opportunities Capital, according to regulatory filings. It will be an integral part of DoubleLine’s plan to raise capital from institutional investors to originate or buy commercial and residential real-estate loans and package at least some into securitized debt.
DoubleLine’s move comes amid a dwindling supply of mortgage bonds that aren’t guaranteed by the government through Freddie Mac or Fannie Mae. While these private-label securities were once a huge source of business for banks and brokerages, they have largely stopped issuing non-agency residential bonds under the weight of post-crisis regulations, creating an opportunity for asset managers.
“There is an emerging trend by money managers to evaluate whether they should fill the void,” said Thomas Capasse, a managing partner at Waterfall Asset Management, a New York-based investor in mortgage bonds and other types of structured securities. “The opportunity exists due to the retrenchment by Street firms.”
Loren Fleckenstein, a DoubleLine spokesman, declined to comment on the initiative.
Investment managers such as Invictus Capital Partners, Varde Management, and Angel Oak Capital Advisors have already gotten into the mortgage securitization business. Rather than investing in bonds put together by other issuers, these asset managers can control the quality of the underlying loans, take advantage of the low cost of financing the debt with MBS, and earn the same types of leveraged profits that banks reap on the spread between the rate at which they lend and the rate at which they borrow.
Control Own Destiny
“In a way, we are controlling our own return destiny,” said John Hsu, head of capital markets for Atlanta-based Angel Oak. “We are determining what we feel to be good credits,” he said, adding “our cost of debt has gone down dramatically.”
DoubleLine’s securitization business may help the firm diversify. While its flagship Total Return Bond Fund, which invests heavily in agency and non-agency MBS, has seen assets slip this year, they rose firm-wide to $116 billion as of October from $101 billion at the end of 2016.
A number of institutional investors, including the Philadelphia Museum of Art, Fairfax County Employees’ Retirement System, NPR Foundation and St. Lawrence University, agreed to back DoubleLine’s mortgage strategy in September through the purchase of partnership interests or notes issued by an Irish affiliate, according to regulatory filings. DoubleLine’s Irish mortgage opportunities affiliates also entered into a revolving credit agreement with Wells Fargo & Co. the following month.