Ellington Financial’s ramping up its timeline for its first securitization of loan securities that don’t meet the Consumer Financial Protection Bureau’s “qualified mortgage” guidelines – in other words, risky subprime assets – is, in part, endemic of a market environment starved for yield. The Ellington Financial non-qualified loan offering packaging, which may not get rated, is a benchmark in a yield-starved world.

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Ellington Financial moves up loan package offering, amid “strong appetite” for yield with risk

Originally, Ellington executives had floated the idea of offering a risky non-conforming loan package to investors in the second half of 2017, but have since moved up that timing, Asset Backed Alert first reported.

On a May 5 first-quarter earnings call, Ellington, with nearly $8.6 billion under management, explained they wanted to take advantage of low funding costs by coming to market in the immediate future.

The move comes amid two recent deals where spreads had tightened significantly. On April 27, Lone Star Funds priced $377.5 million of bonds backed by non-qualified mortgages with a triple-A-rated senior note label and a two-year time horizon at 95 basis points over SWAPS. This appetizing spread comes as a Dallas private equity firm completed a similar deal with a 115 basis point spread.

“There continues to be a strong appetite in the market place for yield,” John Fenn, Managing Director at Berkeley Research Group, told ValueWalk. The fixed income and structured products valuation analyst said risks are being taken that normally would have been shunned. “Investors are willing to make leaps of faith,” amid a “continuing slow grind of the overall spread markets.”

Ellington Financial – Dodd-Frank asks those packaging mortgage investment products to have skin in the game

From Ellington’s perspective, the idea has always been to move ahead on offering such products in an opportunistic fashion when “market conditions would determine if and when it might come to market.”

As it holds nearly $100 million of non-qualified mortgages through the end of March, the report said it was unclear if Ellington would be seeking ratings for the transaction. Fenn notes that such non qualifying loans are to many more “packageable” today than in the past, as underwriting standards have improved, making the marketing process more efficient.

An interesting component of the move is how Dodd-Frank plays a role. Under the post-crisis act, currently being considered for a re-write, issuers of non-qualified mortgage bonds such as Ellington's must keep 5% interests in their transactions. If they wanted to avoid such a requirement, gaining exemption from Dodd-Frank’s risk-retention rule, the borrowers in the loan package must satisfy a laundry list of conditions that include a maximum debt-to-income ratio of 43%, the report noted.

“Dodd-Frank is encouraging those (packaging loan investment products) to have skin in the game,” Fenn observed.