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Hyperion Brookfield's Enhanced MBS Investment Strategy seeks to exploit relative value opportunities in the non-Agency MBS market. Non-Agency MBS are backed by mortgage loans that are not eligible for sale to the mortgage Agencies (GNMA, FNMA, FHLMC), because the characteristics or size of the loan does not conform to Agency standards. The Enhanced MBS strategy also invests in mortgage-related ABS. The market for these non-Agency MBS and mortgage related ABS remains somewhat inefficient, largely due to a general lack of inclusion in indices. There are also information inefficiencies that benefit regular participants like Hyperion Brookfield. Our ability to take advantage of such inefficiencies has consistently contributed to performance.
Historically, non-Agency MBS have exhibited superior prepayment and convexity characteristics relative to Agency MBS and in many cases faster prepayments can actually benefit non-Agency MBS. In addition, there is typically a significant coupon advantage to a non-Agency MBS versus an Agency MBS.
The credit performance among non-Agency MBS can vary. As a result, security selection is the dominant factor in our investment process. This security selection process begins with the accumulation and review of transaction information, including offering summaries and mortgage loan stratifications. Next, a servicer, issuer, and originator review occurs, which is followed by a thorough due diligence of the collateral. A complete structural analysis follows the collateral review, during which the adequacy of the credit enhancement and its triggers are reviewed, and the security and its cash flows are modeled. Finally, an assessment of the deal's relative value – based on its yield spread versus comparable securities, liquidity, duration, risk premium, prepayment risk, suitability – leads to a decision to purchase or decline.
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