New York Mortgage Trust, which securitizes prime residential mortgages, is eager to stand out from other newbie issuers in its sector.
Though it is a real estate investment trust, the company is unlike most REITs, being one of only four to originate its own prime residential mortgages for the deals it issues, said CFO Michael Wirth.
NYMT had its initial public offering in the spring of 2004, when other mortgage lenders also converted to REIT status and went public. But Wirth said his company was the first active prime mortgage REIT to go public through an IPO. It became a first-time issuer in the asset-backed securities market in February 2005, and issued two more deals before the end of the year. Wirth expects the company to continue securitizing regularly this year, though he declined to be specific about potential volume.
Where do you securitize?
One possible change for NYMT this year is the part of the company that does the securitizations. Previous deals came through NYMT itself. But the company is weighing whether to securitize the next deal through its taxable REIT subsidiary, The New York Mortgage Company, LLC.
"When you're an active REIT, effectively you have two parts to the business: you have the REIT side of the business, and you have the origination side of the business, which is a taxable REIT subsidiary," Wirth said. "Where do you securitize? Do you securitize at the REIT level or do you securitize down at the taxable REIT subsidiary level? And there are pros and cons to either."
He said the company is leaning toward using the taxable REIT subsidiary next time so that it can go with a REMIC structure. That would allow for smaller subordinated pieces, which would be more economically favorable.
"If you securitize at the REIT level, you can't use a REMIC structure," Wirth said. "Generally you are limited to an owner trust structure, so your overcollateralization is a little bit greater, which is not as economically beneficial."
Active vs. passive
There are two kinds of REITs: active and passive. Wirth favors one model over the other.
"Passive REITs have been around for a while," he said, citing MFA Mortgage Investments Inc., Annaly Mortgage Management Inc. and Redwood Trust Inc. as examples. "Those REITs go out and buy RMBS or CMBS, lever them up and work a spread."
Wirth - who describes NYMT as an active REIT because it originates the loans it securitizes - said this affords the company
some competitive advantages over passive players.
"What that does is eliminate a lot of the middlemen that get involved between the originator of the loans and the ultimate securitization," he said. "Our cost of loans and, thus, our securitizations is usually less than if you were a passive mortgage REIT purchasing securities."
The higher spread in interest income allows an active REIT to afford more interest rate hedges, Wirth said.
"You're taking on credit risk, but you can mitigate some of that with prudent hedging because the spread is much greater than if you were a passive player," he said.
Wirth conceded that an active REIT takes on a higher level of credit risk by retaining loans it originates.
"We mitigate that credit risk by the fact that we originate and underwrite our loans directly," he said. "There is no one better to understand such credit risks than those directly involved in the underwriting and approval decision."
Another advantage of being an active REIT is that the company can either sell its whole loans to third parties or retain them for a securitization, depending on the market dynamics, Wirth said.
Selling the whole loans to third parties allows the company to recognize gain on sale.
By comparison, a securitization from the REIT portfolio takes more time to impact the bottom line.
"One of the challenges that an active REIT has is, to the degree that it retains loans that it originates, it's not able to recognize that gain-on-sale revenue," Wirth said. "So it transfers those loans to be securitized at GAAP cost for accounting purposes."
He said on the income statements of active REIT players, their taxable REIT subsidiaries appear on paper not to be operating as strong when securitization is used.
"On the other hand, the inherent value - because of the lower cost of origination - is going on the balance sheet and, ultimately, accretes over time to the shareholders as incremental spread," Wirth said.
Three deals so far
NYMT issued three deals in the past year totaling almost $900 million, all backed by whole ARMs. Credit Suisse First Boston served as underwriter for one transaction. RBS Greenwich Capital led the other ones.
Wirth said NYMT selects high quality loans for its securitizations while selling off lower quality collateral as whole loans to third parties. For one transaction, the weighted average loan-to-value was approximately 69.51% and the weighted average FICO score was about 732. The other deals had similar loan characteristics.
Though some analysts expect more REITs to take on servicing in the year ahead, NYMT does not plan to be one of them.
"We find that servicing is somewhat difficult to hedge and value, particularly when prepayment speeds are volatile," Wirth said. "We're not experts at it, and we don't necessarily care to take on something we're not experts at."
He also said a company must be sized properly in terms of capital and resources to take on such a low margin, but high volume, business.
It takes all kinds (but not for ABS)
As a mortgage banker, NYMT offers all types of loan products. But Wirth said it would not securitize risky collateral such as negative amortization loans and option ARMs.
"Those types of things are not something we are comfortable with and we do not want to put in our portfolio," he said. "Who knows what's going to happen? But there's talk of the real estate bubble and real estate values going down. If that's the case, the last thing you want to be in is an option ARM or a neg-am' loan. So we shy away from that."
He said it's difficult to say whether the mortgage industry might move toward tighter or looser guidelines in 2006, as it feels the effects of higher interest rates and lower origination volume.
"It seems like everybody right now is fighting for market share," Wirth said. "Some people are reacting with looser standards and more creative financing, which the regulators are becoming more concerned about."
But he insisted that NYMT would maintain its standards.
"We're not going to do effectively risky lending to maintain market share," he said.
- Bonnie McGeer
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