The Road Not Yet Taken: Impact Investing in the Mortgage and Securitized Asset Markets

Ten years after the 2008–09 financial crisis, there are still lingering negative sentiments about the mortgage market. Talk of tranches, credit swaps and mortgage pools brings up memories of predatory lending practices, and the damage those practices had on families, as well as the broader economy.

But we believe that responsibly issued and packaged mortgage-backed securities—and bonds similarly securitized by other pools of hard assets—are often sound investments. Moreover, we have found numerous opportunities where funds being raised by these securities are deployed in ways that positively impact society.

We fully integrate our environmental, social and governance (ESG) and fundamental fixed income research, in an effort to assess the overall integrity of issuers and evaluate the impact of the capital lent by those issuers. We have found that ESG research helps us in our effort to mitigate losses and enhance risk-adjusted returns for clients, and because we can track the use of proceeds from any given bond issuance, we can identify investments where capital is being used to generate positive environmental or social impact.

Our research in the securitized arena has generally been fruitful over the years, and led to discovery of a wide variety of attractive securitized impact investments. A meaningful proportion of our fixed income strategies are invested in securitized bonds that offer positive impact—this is a particularly important allocation for our sustainable fixed income portfolios. Here are a few examples of the kinds of investments we seek out:

Workforce Housing Bonds

These Freddie Mac-issued bonds support housing with rents that are affordable for the majority of low- to middle-income households in a geographic area. Without programs like this, it is often impossible for teachers and other civil servants to live in the communities where they work.

Housing Finance Agency & CRA-Targeted Mortgage-Backed Securities (MBS)

State Housing Finance Agencies (HFAs) are state-chartered authorities established to help meet the affordable housing needs of the residents of their states. The Community Reinvestment Act (CRA) ensures that banks meet the credit needs of low- and moderate-income neighborhoods in which they do business. Both programs are crucial to providing homeownership opportunities for millions of underserved individuals.

Fannie Mae Green MBS

These are portfolios of single and multifamily loans originated under Fannie’s Green Financing business. Properties accessing financing through this program must either possess a recognized Green Building Certification or demonstrate improvements aimed at reducing energy or water use. Owners receiving this form of financing also must report the property’s annual ENERGY STAR score to track energy performance over the life of the loan.

Consumer Asset-Backed Securities (ABS)

We review a healthy pipeline of deals that provide capital to consumers struggling to access credit. Often, these securities are attractive from an impact standpoint but fail to meet our fundamental investment criteria. To date, we have only invested in one such security—an ABS issued by Oportun, a certified community development financial institution (CDFI) that works with the U.S. Treasury and the state of California to provide inclusive, affordable financial services.

Equipment & Automotive ABS

A variety of asset-backed securities deploy funds raised through their issuance on impactful projects, whether they are labeled as green bonds or not. These securitizations often have meaningful environmental impact; for example, we invested in Hewlett Packard Enterprise’s (HPE) equipment lease trust, a bond backed by leased IT infrastructure equipment. HPE Technology Renewal Centers refurbish or recycle the vast majority of the equipment upon lease termination; under other circumstances, much of that equipment may have ended up in a landfill.

Single-Asset Mortgage Loans

These securities are backed by a variety of commercial real estate holdings, ranging from energy efficient cold-storage warehouses to life-sciences office buildings. The securities we own are backed by properties driving positive impact in areas such as affordable health care, rehabilitation, affordable housing, workforce housing, education/childcare, environmental sustainability and neighborhood revitalization.

The views expressed are those of the authors and Brown Advisory as of the date referenced and are subject to change at any time based on market or other conditions. These views are not intended to be and should not be relied upon as investment advice and are not intended to be a forecast of future events or a guarantee of future results. Past performance is not a guarantee of future performance and you may not get back the amount invested.

The information provided in this material is not intended to be and should not be considered to be a recommendation or suggestion to engage in or refrain from a particular course of action or to make or hold a particular investment or pursue a particular investment strategy, including whether or not to buy, sell, or hold any of the securities mentioned. It should not be assumed that investments in such securities have been or will be profitable. To the extent specific securities are mentioned, they have been selected by the author on an objective basis to illustrate views expressed in the commentary and do not represent all of the securities purchased, sold or recommended for advisory clients. The information contained herein has been prepared from sources believed reliable but is not guaranteed by us as to its timeliness or accuracy, and is not a complete summary or statement of all available data. This piece is intended solely for our clients and prospective clients, is for informational purposes only, and is not individually tailored for or directed to any particular client or prospective client.



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