The return of the specialist: Why a more fragmented mortgage market favors active management

Mortgage investing has always rewarded specialization. In the years after the financial crisis, nowhere was that more apparent than in non-agency residential mortgage-backed securities (RMBS), where similar securities produced dramatically different outcomes depending on collateral, deal structure and servicer behavior. Focused on that market since 2009, I have seen returns driven less by predicting home prices or interest rates than by understanding the differences in underlying loans and how their cash flows moved through complex capital structures. What has changed is the structure of the market around that expertise. The mortgage universe has become broader and more fragmented, while its investors have grown more specialized. Banks, insurance companies, mortgage REITs, asset managers, private credit funds and hedge funds operate with different regulatory requirements, liquidity constraints and return objectives. Many have deep expertise in one part of the mortgage market but lack the mandate, infrastructure or form of capital to move into another. The illusion of a single mortgage market It has become increasingly misleading to speak of a single U.S. mortgage market. Roughly $1...