UNITED STATES - Ohio Public Employees Retirement System is to back an investment strategy to acquire excess mortgage servicing rights (MSRs) tied to residential debt.
The pension fund has agreed to commit $145m (€113m) to the Fortress MSR Opportunities Fund, which will aim to capitalise on banks under pressure to sell MSRs.
According to a report by Ohio PERS analyst Lewis Tracy, banks that control 90% of the market for MSRs are now under pressure to sell, in some cases exiting the business completely.
The rationale for investing in the fund is also based on a relative lack of capital in the market to buy the MSRs, resulting in a supply-demand imbalance and a level of pricing not seen since the 1980s.
Ohio PERS has identified two opportunities in the MSR sector: large banks selling portfolios of MSRs to reduce or eliminate exposure; deals that involve newly originated agency loans from smaller banks, which lack the capability to service the loans themselves.
In the past, large banks would have been a source for these deals, but only Wells Fargo is now in the market.
Ohio PERS came to the decision to invest in the fund as part of its review of real estate debt opportunities arising from distress in the banking industry.
The fund, managed by Fortress Investment Company, is aiming to generate returns in region of 20% and is targeting $605m in investment capital. The fund manager is expecting to contribute 4.1% of the total fund in the form of a co-investment.
The fund will have an eight-year life with an optional two-year extension period.
Ohio PERS has already invested in another Fortress fund this year, committing $200m to the Fortress Real Estate Opportunities Fund in January.