As one of the founders of Five Ten Capital, Carl Bell rode the run-up in rental property prices over the past three years.

From 2011 to 2014, Five Ten purchased over 1500 repossessed homes across the country, converting them into rental properties.

Now Bell is focused on what he sees as “by far the biggest opportunity” in today’s housing and mortgage finance markets: addressing the lending gap to prospective homeowners.

“The marginal buyer of homes today is very strong and, generally, [housing] markets are affordable with home construction still dramatically below long-term trends,” Bell said in a telephone interview. “Household formation is also improving; that’s another tailwind behind home values.”

After a two-year stint at Amundi Smith Breeden, Bell joined Invictus Capital Partners in late May as a managing partner and co-head of investments. He will work with the firm’s Verus Mortgage Capital business.

Verus seeks to acquire loans across the “full spectrum” of creditworthy borrowers who aren’t able to obtain loans in the existing government dominated market. “Right now, to get a mortgage from a bank, you have to be perfect in every credit factor simultaneously,” Bell said.

“If there is a borrower with an imperfect element of their credit, we would look for a strong compensating factor. So, for example, a 30% down payment can offset a less than perfect credit score.”
Eventually, Invictus will look to securitize these mortgages, with our investors retaining exposure through the junior securities created.

Despite the opportunity, banks are reducing their footprint in this market. “They’re focused almost exclusively on the highest credit quality borrowers, which leaves a huge gap in lending,” Bell said.

Ability-to-repay rules carved out a narrow definition for Qualified Mortgages, which give lenders a legal safe harbor. “The self-employed do not fit into it well; this is a standard that works best for W-2 income earners,” he said.

That leaves a huge opportunity for other lenders.

While banks lend to consumers with the best credit at 3.5%, they largely ignore potential non-QM borrowers that are available with limited credit risk at a coupon rate of 6% or higher – which Bell notes is comparable to the current yield on the high yield corporate bond index. And high yield corporate bonds have defaulted at a rate in excess of 10% in the last three recessions.

“Through the acquisition of well underwritten loans to homeowners at 6%, you can create an asset that is far more attractive than a high yield corporate bond,” Bell said. “You just need to have the operational expertise and sourcing relationships to execute the strategy.”

Invictus will also look for opportunities to expand into other types of consumer credit—this market is “staggeringly large.”

While people are still deploying capital to the single-family rental strategy, Bell said that “the easy money has been made. It’s not like you’re getting 10-15% annual home price appreciation; from here, it will be more like 3-5%.”

Bell has 24 years of experience managing fixed income, first at Smith Breeden Associates (1991-1997) and then at Putnam Investments (1998-2011), where he was a managing director and team leader for structured investments.

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