This global investment firm wants to become a non-QM rainmaker

HW+ mortgage rates desk

Minneapolis-based CarVal Investors, a global alternative investment manager and long-time player in the mortgage market, has launched a real estate mortgage investment conduit, or REMIC, that plans to work with loan originators around the country to develop and acquire innovative nonagency mortgage products.

The new REMIC, Mill City Loan Holdings LLC, will serve as a mortgage conduit for funds managed by CarVal while also developing relationships with originators to acquire “residential mortgage assets across multiple strategies,” according to a CarVal statement announcing the launch of the REMIC, which will do business as Mill City Loans.

A REMIC is a special purpose tax vehicle that holds pools of mortgages and issues multiple classes of ownership interests to investors in the form of pass-through securities, such as bonds. REMICs are tax exempt under federal law, although the income earned by investors is taxable.

“We expect it to be a challenging [mortgage] market from a volume perspective due to interest rates and credit spreads,” said David Pelka, head of RMBS business and a principal at CarVal. “However, we are optimistic on both opportunistic mortgage-loan acquisition opportunities as well as continued product evolution of non-QM — not just this year, but through this economic cycle. 

“This is why our funds founded a mortgage conduit, Mill City Loans.”

CarVal Investors is a major player in the investment management world, with a focus on acquiring, managing, selling and securitizing loans, including credit-intensive assets, such as non-QM mortgages. Pelka said his firm has invested more than $24 billion in nearly 2,000 loan portfolio transactions globally since 2014. CarVal, which also has offices in New York, London, Luxembourg and Singapore, currently has more than $11 billion in assets under management — including corporate securities, loan portfolios, structured credit and hard assets.

The investment management firm and its affiliated funds also are active in both the residential whole loan and RMBS markets, with some 30 years of experience buying, managing and trading nonperforming, sub-performing and reperforming loans. CarVal has acquired $10 billion in whole loans over the past decade and a half, Pelka added, and securitized $5 billion in residential mortgages, primarily through its Mill City Mortgage Loan Trust shelf.

As the mortgage market transitions from a refinancing-dominated cycle to one where rising rates move purchase mortgages to the forefront, Pelka said he expects many originators will be looking for more inroads into that purchase market, such as innovative non-QM loan products. CarVal’s new REMIC will act as a tool for providing liquidity for that evolving market, according to the Mill City Loans website.

“Mortgage volumes overall will be under pressure as long as rates are high, increasing and/or volatile,” he said. “Non-QM will need to be re-priced to higher coupons as well, which will also impact volumes.

“I expect it will be a challenging environment for originators,” Pelka added, “which is why we are excited to have Mill City Loans as a mortgage conduit to meaningfully partner with originators to offer interesting nonagency mortgage products.”

The range of nonagency, non-QM mortgage products is broad and encompasses the self-employed borrower as well as entrepreneurs who purchase investment properties — and who can’t qualify for a mortgage using traditional documentation, such as payroll income. As a result, they must rely on alternative documentation, including bank statements, assets or, in the case of rental properties, debt-service coverage ratios. 

Non-QM mortgages also go to a slice of borrowers facing credit challenges — such as a recent bankruptcy or slightly out-of-bounds credit scores. The loans may include interest-only, 40-year terms or other creative financing features often designed to lower monthly payments.

Pelka said Mill City loans will be led by mortgage-industry veterans Trey Jordan, former general counsel at New York Mortgage Trust; Mike Petersen, a former TCF Bank executive with experience in capital markets and loan-portfolio management; and Kent Usell, a mortgage and investment banking expert who worked previously at New York Mortgage Trust and alternative investment firm Oak Hill Advisors.

“We see significant opportunity,” Pelka said, “both navigating the current uncertainty, but also partnering with originators [through Mill City Loans] to develop meaningful nonagency mortgage products.”

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